Net assets for the Canada Pension Plan Investment Board have grown to $337.1 billion Cdn after a very busy year of activity in the global real estate sector, which now comprises 12.7 per cent of the total portfolio or $42.8 billion.
The combined assets of commercial real estate, infrastructure and agricultural land, reached $75.3 billion or 22.3 per cent of the total CPP Fund at the end of 2017.
In an email interview with RENX, Peter Ballon, global head of real estate investments for CPPIB, outlined a globally diversified strategy to maximize sustained returns without undue risk.
“We developed our investment strategy with a long-term view in mind. It is structured to be resilient in the face of wide-ranging market and economic conditions,” said Ballon.
“It covers all major asset classes, controls significant risk factors and encompasses approximately 30 distinct investment programs. With this approach, we’re able to achieve the right balance of risk and returns while seeking to add significant additional value through active management. Our goal is to achieve sustainable returns over the long term for the benefit of Canadians.”
He said CPPIB builds and manages a portfolio of property investments, which offers stable income streams that rise with inflation over the long term, and asset values that likewise grow over time.
“As such, it provides diversification benefits to the fund, as it has a relatively low correlation with other asset classes such as public equities and bonds, and helps cushion the fund against market and business-cycle volatility,” said Ballon.
As of the end of 2017, CPPIB’s real estate holdings comprised 324,398,000 square feet of total gross leasing area. The portfolio consists of office, retail, industrial, residential and multi-family properties all over the world.
Major 2017 CPPIB investments
Some of the major investments made by CPPIB over the past year include:
* Launched a major U.K. Build-to-Rent investment partnership with Lendlease, with an initial target to invest $2.67 billion in the sector via a develop-to-hold strategy. The partnership will begin with an investment of approximately $801 million in the next phase of new homes at Lendlease’s Elephant Park development in Elephant & Castle, London. CPPIB will invest approximately $623 million for 80 per cent. Going forward, new projects will be funded on a 50/50 basis;
* Acquired 100 per cent of Parkway, a Houston-based real estate investment trust, for $1.5 billion or $29.55 per share. Parkway owns the largest office portfolio in Houston, approximately 8.7 million square feet across 19 properties;
* Invested $320 million to acquire an interest in Goodman Hong Kong Logistics Partnership (GHKLP). GHKLP is one of Goodman’s flagship logistics partnerships, with the largest portfolio of modern logistics properties in Hong Kong;
* Extended cooperation with Longfor Properties to develop two new mixed-use real estate development projects in Chengdu and Shanghai in China, for a total CPPIB commitment of approximately $800 million;
* Formed a joint venture with GIC and Cortland Partners, with a targeted equity amount of $705 million to acquire and renovate 8,000 to 10,000 class-B multi-family units in the U.S. CPPIB and GIC will each own 45 per cent and Cortland Partners the remaining 10 per cent interest. The joint venture has initially acquired three value-add, class-B garden-style communities in high-growth markets of major U.S. metropolitan areas;
* Acquired a U.S. student housing portfolio for approximately $1.4 billion through a joint venture with GIC and The Scion Group LLC. CPPIB and GIC each own 45 per cent and Scion 10 per cent. The portfolio consists of 24 assets in 20 diversified university campus markets across the U.S. comprising 13,666 beds. The joint venture’s portfolio now includes 73 student housing communities (46,500 beds) in 52 top-tier university markets;
* Partnered with Alpha Investment Partners Limited and Keppel Data Centres Holding Pte. Ltd., for an initial allocation of up to $449 million alongside the Alpha Data Centre Fund (ADCF), with the option to invest another $192 million. Launched in 2016 by Alpha, ADCF aims to develop a portfolio of data centre assets in Asia Pacific and Europe.
Real estate portfolio “well-diversified”
“The real estate portfolio remains well-diversified across major markets globally, including developed markets such as North America, Western Europe and Australia, and emerging markets including China, India and Brazil,” said Ballon. “We have real estate investment professionals on the ground in seven offices around the globe with a mandate to find the best investment opportunities available in their market.
“CPPIB has been successful in securing attractive opportunities in major markets due to our strong execution capabilities locally and from our long-standing relationships with our operating partners who continue to be a valuable source of deal flow.”
Ballon said CPPIB is an active investor in all major types of real estate and continues to invest across the globe in developed and emerging markets.
He said CPPIB’s Total Portfolio Approach ensures planned risk exposures at the total portfolio level are maintained as individual investments enter, leave or change in value.
“The approach essentially diversifies the portfolio at the level of risk and return streams, rather than at the level of specific asset classes such as real estate or infrastructure,” said Ballon.
“By adopting this approach – essentially taking a total portfolio view – we’re able to avoid the pressure to buy or dispose of illiquid investments at non-preferable times just in order to stay close to allocation targets. Instead, we look through asset class labels to assess risk – and make decisions accordingly.”
Diversify U.S. multi-family holdings
The new joint venture with GIC and Cortland Partners enables CPPIB to add diversification to its U.S. multi-family portfolio, said Ballon. The majority of its multi-family properties are Class A assets in prime urban locations.
The Cortland Partners-GIC JV will focus on major markets throughout the Southern and Southeastern U.S.
Ballon said Class B properties in the portfolio are generally well-maintained older assets with opportunities for improvements to the buildings for the benefit of tenants, ongoing maintenance and long-term appreciation.
Ballon said there are no plans to convert some multi-family assets into student housing. The joint venture with Cortland Partners and GIC is focused on Class B multi-family properties in the U.S., a sector which CPPIB believes offers attractive risk-adjusted returns supported by strong population and job growth.
As of December 31, 2017, the CPP Fund had net assets of $337.1 billion. Its assets by region and total percentage of the Fund were:
* Canada, $53.5 billion, 15.9 per cent;
* United States, $124 billion, 36.8 per cent;
* Latin America, $10.9 billion, 3.2 per cent;
* Europe (excluding UK), $45.1 billion, 13.4 per cent;
* United Kingdom, $18.8 billion, 5.6 per cent;
* Asia $69.2 billion, 20.5 per cent;
* Australia, $10.9 billion, 3.2 per cent;
* and other $4.7 billion, 1.4 per cent.
CPPIB says the portfolio achieved strong 10-year and five-year annualized net nominal returns of 7.4 per cent and 12.1 per cent, respectively, and four per cent net of all CPPIB costs for the quarter.