“As the rest of the world becomes more and more volatile and more and more uncertain, the segments of the real estate market that perform best are those which can present stable and reliable cash flow,” said KingSett Capital chief investment officer Rob Kumer. “Pretty much all investors, regardless of whether you’re a REIT or a pension fund, are flocking to the same assets for that reason.”
Canada Pension Plan Investment Board (CPPIB) real estate investments director Sharm Powell said real estate has become a more important part of the investment mix for pension plans. The CPP fund, valued at about $330 billion, is invested on behalf of 21 million Canadians. Its real estate assets are in a variety of classes and countries and are worth $47 billion, with $6 billion of that in Canada.
“We get lots of inquiries from inside and outside of Canada from investors that would like to place more capital here,” said Stephen Robertson, managing director and head of transactions for pension fund advisor LaSalle Investment Management.
Record-breaking commercial real estate sales
There was a record-breaking $43.1 billion in Canadian commercial real estate industry investment in 2017, and Powell said low interest rates, strong market fundamentals and foreign investors are three major reasons why.
“For REITs, there are a lot more strategic shifts that lead to a lot more trading volume,” said RioCan Real Estate Investment Trust (REI-UN-T) senior vice-president of investments and residential Jonathan Gitlin, adding another factor. “That’s creating a lot more movement within a space that was once formed on a model where you buy and hold forever.”
Robertson said the large amount of available capital is driving up real estate prices, especially in Toronto and Vancouver where there are limited supplies and low vacancy rates. He added that Montreal and Ottawa have turned a corner and are looking more promising than in recent years, while Calgary and Edmonton are also showing signs of a turnaround.
Gitlin concedes there are challenges in the retail sector, where RioCan is most heavily invested, but feels most are overblown. Still, he said these issues have prompted many retail landlords to change the way they do business.
“As a predominantly retail landlord, it’s up to us to figure out how to stay ahead of new trends in retail and help our tenants evolve their way of doing business.
“We work hand in hand with them, which is a bit of a departure from the way it’s always been, which has been the tenant is our counter-party and we just have to extract as much rent from them as possible to thrive and survive. Now we’ve got to evolve and figure out how to work with them to make their businesses successful.”
Assessing opportunities and risks
Kumer said he and his KingSett teammates spend a lot of time considering potential risks caused by such factors as:
* changes in technology;
* the rapid evolution of cities and the way they operate;
* the way people move around in cities;
* people’s workplace needs and wants;
* and the evolving shopping experience.
These things can’t yet be measured with any degree of certainty so Kumer said it requires “a lot of instinct and a lot of collaboration with your colleagues to understand what the risks are” going forward.
“I think there are opportunities in all asset classes in all markets,” Kumer added. “The key for us is to look for opportunities where we think the returns are properly compensating us for the risks.”
“The increase in return that you get now from taking on risk is shrinking from where it was,” said Robertson. “That’s really a challenge, so whatever direction you decide to go in, you’re going to want to underwrite really carefully and have an investment thesis that you believe in.”
Where investments are being made
Office and retail have traditionally been the two real estate sectors in which pension funds have focused most heavily. But, Powell said, CPPIB has grown more keen on industrial and healthcare properties, multi-family and student residences, and data centres.
Since new acquisitions are becoming harder to come by, RioCan is looking within its portfolio to create more value through rezoning and intensifying properties.
“The use of the property is less important than ever before,” said Gitlin. “It’s the actual property itself, and the underlying fundamentals of that property, that’s more important.”
CPPIB tries to do its real estate deals as part of partnerships, which Powell said can limit its investment options.
“One of our big challenges that we think about every day is finding those right opportunities, and finding the opportunity to do it in conjunction with the right partner.”
International perception of the Canadian market
Toronto-headquartered CPPIB has offices in Hong Kong, London, Luxembourg, Mumbai, New York City, Sao Paulo and Sydney that employ 75 real estate specialists. That gives it a good perspective on how the Canadian market is perceived internationally.
“Canada is very steady and somewhat predictable,” said Powell. “That’s a very big plus in our favour.
“The challenge is that it’s expensive on a relative basis if you look at some of the other opportunities that we get a chance to look at.”