COMMENT: The little market that could

While often overlooked, the Canadian property market this week yielded one of the most interesting private equity real estate deals in recent memory. 

In the world of private equity real estate, Canada isn’t necessarily the sexiest property market. The Great White North, for one, has limited supply: its total office market, for example, measures about 506 million square feet, compared with nearly 4 billion in the US, according to commercial real estate services firm Avison Young. And its largest property owners – the domestic pension plans and real estate investment trusts – typically are long-term holders of real estate. In light of all this, Ivanhoé Cambridge’s sale of a vast Canadian commercial real estate portfolio to Cominar, the country’s third-largest REIT, this week really stood out.

The hefty price tag, of course, was attention-grabbing: Ivanhoé’s share of the portfolio – which included 11 shopping centers, three office buildings and one industrial property and had an aggregate value of C$1.63 billion – traded for C$1.527 billion. According to Bill Argeropoulos, director of Canadian research at Avison Young, the trade was the largest commercial real estate transaction in Canada since ING’s sale of a 50 percent stake in a 400-property industrial portfolio to KingSett Capital and the Alberta Investment Management Corporation for C$2 billion in 2010.

What’s more interesting, however, is the significant disposition by Ivanhoé, which is the real estate subsidiary of the Caisse de dépôt et placement du Québec, the second-largest pension plans in Canada. Canadian pension plans don’t typically sell such large portfolios unless they’re looking to consolidate their property holdings or refocus their investment strategy. Moreover, the trade was said to be an off-market deal and a bit of surprise in the marketplace.

Indeed, Ivanhoé has indicated its plans to be a net seller of real estate over the next year. In an interview with PERE earlier this year, Bill Tresham noted that the company had identified numerous assets back in 2010 that no longer were considered long-term holds.  Among the properties it was putting on the market were a number of Canadian shopping malls that were considered to be weaker performers and that no longer fit in within the company’s retail strategy, which has been shifting to higher-end properties. Ivanhoé is undertaking the disposition of some of its hotel assets globally as well.

Ivanhoé also has been more focused on investing in real estate through platforms, rather than on the asset level. So what makes the deal even more unique and noteworthy was that it was not only a property disposition, but a platform investment, by Ivanhoé. Simultaneous with the sale of its portfolio stake to Cominar, Ivanhoé also has agreed to purchase $250 million of shares in the REIT. This acquisition would effectively give the company approximately 8.5 percent ownership of Cominar, making it the REIT’s largest shareholder. It therefore would still retain partial ownership of the assets that it is selling, albeit indirectly, while shifting more in line with its current real estate strategy. 

Globally, the Ivanhoé sale is part of a larger trend where portfolio trades are up 30 percent worldwide from 2013, and are driving an increasing portion of real estate investment activity, according to commercial real estate services firm JLL. Within Canada, the property market could see more large deals this year – although unlikely at the magnitude of the Ivanhoe sale – especially as the local pension plans continue to cull their portfolios and rethink their real estate strategies. Let’s not forget that Canadian pension plans have been among the most forward-thinking and innovative investors in the industry. Their country’s property market, while small, is not to be underestimated.