CPP Investments further reduced real estate holdings in FY 2024

The Canadian pension plan posted a 5% loss in the asset class, blaming the poor performance partly on rising interest rates. 

CPP Investments, the investment arm of the Canada Pension Plan, reduced its real estate exposure for the third time in six years as it posted a 5 percent annual loss for the asset class for its fiscal year 2024.

In an annual report, the Toronto-based pension fund, which has C$632 billion ($463 billion;€426 billion) in assets, reported higher dispositions in real estate during the fiscal year ended in March, with office assets falling to 6 percent of its real assets portfolio from 9 percent during the previous fiscal year. Retail was also a drag on CPP’s real estate performance but stayed steady at 6 percent of its real assets holdings. Logistics dropped a percentage point to 12 percent, lowering real estate’s share of the fund’s real assets holdings to 36 percent, down from 38 percent the year prior. 

CPP’s disposition activity generated C$2 billion in performance fees last year, up from C$1.7 billion the year prior, as a result of its realizations in real estate and private equity. Some of the investor’s notable property sales last year include the offloading of its 50 percent stake in Kumho Asiana Main Tower in Seoul, which netted C$181 million. The pension plan also exited a joint venture vehicle it established to invest in Australian shopping centers by selling Midland Gate Shopping Centre in Perth for C$85 million. CPP also sold 45 percent of its stake in a portfolio of medical office buildings in California for C$137 million.

Those sales helped lower CPP’s real estate exposure to 8 percent of its total portfolio. Real estate, along with infrastructure, represent the smallest asset allocations for the pension plan, each down a percentage point from the year before. Private equities accounted for the greatest share of assets at 31 percent, followed by public equities at 28 percent and credit at 13 percent. Government bonds accounted for the remaining 12 percent.

The pension plan’s allocation to real estate stood at 12.1 percent at the end of fiscal year 2019, and slipped to 11.3 percent the following fiscal year before dropping into the 9 percent range during fiscal years 2021-23.

CPP’s real estate portfolio is now 33 percent logistics, 33 percent other real estate, 16.5 percent office and 16.5 percent retail.

Over the past five years, CPP’s real estate assets have appreciated by 0.7 percent, the second-worst rate of return among its asset classes. Only government bonds, which fall when interest rates rise, performed worse with a -0.3 percent five-year return. By comparison, private equities appreciated by 13.9 percent, public equities by 8.4 percent and infrastructure by 5.9 percent over that timeframe.

CPP’s annual report attributed the poor performance of its real estate assets to rising interest rates but noted that “investments in the logistics sector were an exception as they experienced increased tenant and investor demand for most of the five-year period.

“This contrasted with retail and office investments, which were negatively affected by the transition towards e-commerce and the impact of evolving hybrid workplace trends.”

Despite the challenges to its real estate portfolio, CPP reported a net return of 8 percent for the last fiscal year and a $62.3 billion increase in net assets. Those gains were driven by the strong performance in public equity, private equity, credit, infrastructure and energy, according to a press release.

John Graham, president and CEO of CPP, said in a statement the strong overall performance was evidence of a sound investment strategy, though challenges lie ahead in the form of “continuing geopolitical and economic uncertainties.”