For the Healthcare of Ontario Pension Plan (HOOPP), high valuations are having a short-term impact on its real estate investment activity.
“The valuations are very high in almost all asset classes, so there's not a lot of room for error,” said Jim Keohane, HOOPP president and chief executive, during its first media call on its annual results yesterday. “We do have some concerns about valuations and economic activity, so we are trying to be conservative.”
With respect to real estate, “in the short run, it becomes challenging to find opportunities that you wish to pursue,” said Keohane. “We're actually underweight in real estate versus our target right now, because we have had trouble finding deals that we want to invest in.”
HOOPP currently is between 10 and 11 percent allocated to real estate, against a target of 12.5 percent of its overall investment portfolio. HOOPP's allocation to the asset class, moreover, decreased from 12.2 percent last year, largely because of the growth of its overall portfolio, which increased from C$51.6 billion (€37.56 billion; $41.41 billion) to C$60.8 billion in net assets last year.
Valuations, however, haven't affected HOOPP's long-term outlook on real estate, which is one of five asset classes within its investment portfolio, along with nominal bonds, real return bonds, public equities and private equity. “We think it's a very good asset class in the long run,” said Keohane. “We do have a very long-term time horizon, so we can afford to wait for better opportunities.
One of HOOPP's principal reasons for investing in real estate is a hedge against wage inflation, which has a very high correlation with real estate price movements, he said. Property also has been “a very high returning asset class” for the pension plan. Its real estate portfolio returned 9.8 percent in 2014, beating a benchmark return of approximately six percent. HOOPP's overall return for the year was 17.71 percent.
Much of HOOPP's real estate portfolio currently is invested in development projects in Canada and Europe. One such project is the redevelopment of Creechurch Place, a 271,000-square-foot office property in the City of London. The joint venture with UK developer Helical Bar, which was announced last May, is due to be completed by the fourth quarter of 2016. Among other projects, HOOPP also is building One York Street, a 35-story office tower in downtown Toronto with local real estate company Menkes Developments. The 800,000-square-foot property, which has an estimated construction cost of C$375 million, will also serve as HOOPP's new headquarters when it opens next year.