The Healthcare of Ontario Pension Plan is ramping up its development activity in real estate globally, the head of the pension plan said.
“We’re doing more development work than we’ve done typically in past,” Jim Keohane, president and chief executive of the C$70.4 billion ($52.38 billion; €49.08 billion) pension plan, said in an interview with PERE. “There’s a pretty significant gap between buying standing inventory and doing new development. It’s more attractive to build right now.”
HOOPP also prefers to own newer properties because they are more efficient and more attractive to tenants, he added: “Along with the valuation gap, it is why it makes more sense to build than buy right now.”
He added that real estate has been “much more attractive on the development front over past five years,” and anticipates that HOOPP will remain an active builder in real estate in the coming year. The pension had 10 percent of its real estate portfolio in development as of January.
In 2016, HOOPP completed eight development projects totaling C$580 million, including One York Street in Toronto, Marine Gateway in Vancouver and four industrial projects in Europe. It also committed to C$575 million of new developments last year, including five industrial projects in Europe and the UK, and three residential, industrial and mixed-use projects in the US. The remainder of its C$1.5 billion in real estate activity last year came in the form of C$470 million in real estate fund commitments.
By comparison, HOOPP completed six development projects in Canada and the UK totaling C$368 million and committed to new developments worth an aggregate C$170 million in Germany, the UK and Canada in 2015. In 2014, HOOPP finished six development projects totaling C$185 million.
A big focus of HOOPP’s development activity has been in the European industrial real estate sector, where it is constructing properties in France, Germany, Sweden and the UK in partnership with London-based logistics developer Verdion. “It’s kind of a new product for Europe – one million square foot, 40-foot ceiling warehouse facilities,” said Keohane. “You’ve had an increase in online shopping; it’s created a bigger demand for that type of product.”
HOOPP has increased its allocation to overseas real estate in recent years. In September 2015, PERE reported that the pension plan held a total of C$10 billion in real estate, of which about 85 percent is in Canada, 10 percent in Europe and five percent in the US. The 2016 report said the geographic exposure has now shifted to 71 percent in Canada, 14 percent in Europe and eight percent in the US.
“We’re seeing better opportunities at the moment in markets outside of Canada,” which HOOPP considers to be fully priced, said Keohane. However, HOOPP intends to focus its international real estate efforts on Europe and the US for the foreseeable future, rather than expanding into new geographical markets.
“In Europe and the US, it’s very clear what the rule of law is,” he said. “When you get into some of the emerging markets, it’s a little less clear. Valuations in certain emerging markets are also a little high, so it hasn’t been very compelling to go there. The US is such a big market, and there’s a lot of opportunities with the dislocation in Europe. We’re finding that we have enough on our plate to keep us from venturing further ashore.”
Real estate was the third-best performing asset class for HOOPP in 2016, returning 12.19 percent on a currency hedged basis, outperforming its Canadian Investment Property Databank benchmark by 6.79 percent, according to HOOPP’s 2016 annual report. Canadian equities were the top performer, returning 21.45 percent, followed by private equity, with a 15 percent return.