Property Biz Canada

Standard Life Real Estate Fund at $1 billion-plus – and growing

It took three decades for the Standard Life Real Estate Fund to top $1 billion in assets. It's a safe bet it will rack up its second billion in far less time.

“We are $1.2 billion already,” said Blair McCreadie, who is in charge of the fund as Head of Canadian Real Estate with Standard Life Investments.

That number is going to grow, thanks to a flurry of as yet unannounced deals. “We closed a deal yesterday, (Wednesday, Sept. 12) and we are going to go firm on another one today and another one on Monday,” said McCreadie.

The first property the SLRE Fund closed on last week was Ottawa’s Innes Park for $78.75 million. The fund believes that the deal for the 670,198 square foot industrial park is the largest such transaction in the city’s history but was unable to confirm that fact on short notice. The fund was not able to talk about the other two transactions at this time.

Search for yield driving growth

A fully open-ended pooled fund, one of just four in Canada by Standard Life’s reckoning, it is attracting ever-increasing investments from institutions, most notably pension funds seeking returns in today’s ultra low-interest rate environment.

“The bucket called alternative investments that real estate falls into, along with infrastructure and private equity, has become a popular asset class,” said McCreadie. “Real estate has gone from an allocation of under 5% to at least 10% for them. They are all looking for (yield) of CPI plus 300 to 500 basis points.”

The Standard Life fund’s open-ended nature is ideal for pension funds, said its manager, because it is extremely liquid. Funds can get their capital out with a simple phone call. “That’s why it is a pretty good vehicle for them – and pension plans don’t like to invest in a REIT. It operates similar to a REIT in that sort of quasi-liquid mode of a REIT, but it is not a REIT.”

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While it throws off a revenue stream to investors like a REIT, another difference is that the Standard Life fund’s investors generally reinvest all the returns back into the fund. “So our job is to invest this money that we keep getting from the pension plans. It has been a fairly good run for us and we have been performing so it has provided everything that they need.”

The fund is only open to Canadian investors and only buys domestic real estate.

SLRE’s balanced approach

The fund has a balanced strategy for all commercial asset classes: office, industrial and retail, in all major markets and some secondary markets with a view to providing income for its investors. The current breakdown is approximately 50% industrial and 25% apiece for office and industrial. ”It has a very low debt strategy, it has no debt strategy in fact,” said McCreadie. “We assume debt if we need to and we retire it when it matures.”

A bragging point for the fund when compared with its competitors, said its manager, is that the fund has maintained liquidity since it was set up in 1982. “We have never had to suspend redemptions in any way. We have had a 9.4% average return over its life.” It has only had one negative annual return in its lengthy history. The fund typically keeps 10% of assets in cash to deal with any redemptions should they occur.

Standard Life announced that its real estate fund hit the $1-billion mark in July. The acquisition that pushed them over the top at the time was the 10-storey, 8 West office building in Calgary.

The fund’s most prominent holding, McCreadie said, is the Quarry Park portfolio in Calgary which it purchased in the summer of 2010. “This is arguably the best suburban office product in Calgary.”

Riding the real estate wave

Standard Life notes that the country’s aging population and the need for steady sources of income and investment opportunities is putting the spotlight on Canada’s commercial real estate sector “where the market exhibits strong fundamentals, and the economy and outlook are healthier than in other G8 countries.” With low vacancy rates and a generally positive supply outlook, “the market is attracting global-minded investors and also contributing to the shift many major institutional investors are making away from public equity towards private placement,” Standard Life added.

Standard Life Investments makes its case in a recent white paper: The World Needs Canada: Why Canadian Real Estate is a Compelling Investment Opportunity.

Going global

Based upon the recent success of the SLRE Fund, Standard Life is currently in the process of expanding its fund offerings in Canada to include a complimentary new Canadian real estate investment strategy that will use higher levels of debt, as well as generate additional returns through the development and repositioning of assets.

Another difference is that the new fund will be open to global investors.

As well, Standard Life will be introducing to Canadian investors a number of its funds managed out of its U.K. and European offices such as the European Property Growth Fund (EPGF) as the Global REIT strategy.

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