The Canada Pension Plan Investment Board (CPPIB) has set aside at least $1.4-billion to bargain-hunt during the credit crunch for top-quality office and retail properties in the United States and the United Kingdom.
In addition to this capital, which will be invested in opportunistic real estate funds run by managers including The Blackstone Group and Morgan Stanley, the CPPIB is also searching for direct investments, said Graeme Eadie, senior vice-president of real estate investments at the CPPIB.
Direct investment partners could include other pension funds or sovereign wealth funds, the type of well-capitalized investors that can do deals when more heavily leveraged buyers are forced to sell, he said.
“People are under pressure to solve their debt problems, which often means selling the best assets because those are the ones they can sell,” Mr. Eadie said.
The $128-billion pension plan prefers to invest as a financial partner alongside firms that will handle the day-to-day property management, he said.
The CPPIB has about half a dozen direct investment opportunities right now, and a deal could come fairly quickly, he added.
Aggressive use of debt has caused stress in the U.S. and U.K. markets, and consequently they are expected to yield the best buying opportunities, Mr. Eadie said.
More forced property sales like those made this year by indebted real estate mogul Harry Macklowe are likely to occur, said Michael Smith, analyst at National Bank Financial.
“I think we'll see more Macklowe-type situations where the owner is distressed, but the assets are not, over the next 12 to 24 months,” Mr. Smith said.
Canada's big pension funds invest in real estate and infrastructure assets for their stable, long-term cash flow and as a hedge against inflation.
Many have been raising their stakes in the sectors to diversify holdings which had been largely concentrated in the public markets.
The CPPIB currently has $65-billion, or 51 per cent, of its assets in public equities.
Pension funds are expected to take a big hit in their latest results due to ongoing stock market volatility. The CPPIB is scheduled to release second-quarter results in mid-November.
In the financial year ended March 31, 2008, the CPPIB was down 0.29 per cent on its investments. Its public equity investments fell by 6.8 per cent during the year. Its annualized return for the past four years, including periods when the equity markets were much stronger, was 9 per cent.
For the CPPIB, the choicest buying opportunities in real estate will be for top-quality office and retail properties, which until recently have been hard to come by.
During the boom times, the CPPIB bought little real estate in the U.S, because prices were too high, underwriting was too aggressive, and there was too much growth built into the investment assumptions, Mr. Eadie said.
Of the $7-billion the pension plan currently has invested in real estate, just $600-million is in the U.S.
Times have changed, however, and recent data show a dramatic slowdown in both office and retail property sales in the U.S.
In the third quarter of 2008, $13.5-billion worth of office properties changed hands in the U.S., the lowest level since 2004, according to research firm Real Capital Analytics. Sales for all of 2008 are expected to be lower than they were in the first quarter of 2007, according to information on the company's web site.
Tough times are also expected to continue in the U.S. retail sector due to tighter credit markets and low consumer confidence, Real Capital has said. In September, 80 retail properties worth $5-million each were sold, compared with more than 500 in a four-week period in early 2007.
As the market adjusts to these new conditions, the CPPIB is patiently waiting for asset prices to fall, and expects more buying opportunities to emerge in the next 24 months, Mr. Eadie said.
Despite sagging consumer confidence and economic conditions, a focus on long-term, high quality assets should mitigate the risk of the investments, he added.
Some of the pension fund's holdings in the U.S. and the U.K. include a $125-million investment in a joint venture that owns office properties in Denver, Colo. That venture is sponsored by Callahan Capital Partners, a Chicago-based private equity firm formed in 2006 by former executives of Trizec Properties Inc.
The CPPIB also invested $590-million in shopping malls in various cities in England and Scotland last year.
Unlike these geographic markets, the pension plan sees few opportunities arising in Canada.
“I don't think there'll be a lot of asset sales of high quality buildings because the ownership is generally in very strong hands,” Mr. Eadie said.
Large pension funds and other institutions own much of Canada's top office and retail properties, and are able to withstand downturns in the markets.
The CPPIB does have some ongoing development projects in the Canadian retail sector, including shopping centres being built in Hamilton, Calgary and Toronto.
Mr. Eadie said he expects there to be some softness in the Canadian office market, particularly in the leasing markets in Calgary and Vancouver, and said the CPPIB will continue to focus on the retail sector for the time being.
© The Globe and Mail
