LaSalle Investment Management has closed its fifth Canada-focused value-add fund with commitments exclusively from European institutions, PERE has learned.
The Chicago-based firm held a final close for LaSalle Canada Income & Growth Advantage earlier this month on C$306 million ($245 million; €216 million). Previous funds in the series, and LaSalle’s open-end Canada Property Fund, have all attracted a diversified group of investors from around the globe. This is the first to be capitalized solely by European investors.
“We’ve been very successful in Asia, in Europe and elsewhere raising large tickets from large institutions; $150 million to $300 million are some of the investment sizes,” John McKinlay, chief executive of LaSalle’s Canadian operations, tells PERE. “So, this is not new, it’s just a pivot in terms of where the capital flows are coming from.”
While LaSalle has had success raising funds around Canadian strategies, amassing roughly $2 billion of capital for its core and value-add series, it has been a large fish in a relatively small pond.
In 2020, the research firm MSCI ranked Canada seventh globally in terms of market size at $364 billion. It holds the same position in terms of cross-border investment volume, with $20 billion of such sales through Q3 2021, according to CBRE. Total transactions range from $30 billion to $40 billion annually, roughly one-10th of the US transactions.
McKinlay acknowledges that Canada is not often viewed as a destination for institutional capital, let alone one worthy of a standalone strategy. Many assume that the market is illiquid because of its size and the dominance of domestic pensions. But, on an unleveraged basis, Canada’s real estate market has had an average annual return of 7.9 percent over the last 15 years, outperforming the US’s 7.1 percent and the UK’s 4.7 percent with lower volatility, according to index data from MSCI and industry group NCREIF.
This dynamic, paired with LaSalle’s position as one of the few managers of its size focused on Canada, gave the firm an advantage in the fundraising market, McKinlay says.
“Most people are very familiar with the core, value-add, opportunity stories in North America – they’ve heard it all and they get enough pitches about it,” McKinlay says. “With Canada, we stood out in the crowd, because there weren’t many groups with a global platform doing this.”
Fertile ground
LaSalle launched CIG Advantage just before the covid-19 outbreak, meaning commitments were subsequently put on hold, says Chris Lawrence, portfolio manager of the series. When transactions resumed, European pensions were the first to begin investing internationally again, he says.
Lawrence credits LaSalle’s nearly-20-year track record in Canada as a key selling point for the fund. He declines to share past fund performance but notes that CIG Advantage is targeting a gross return between 17 percent and 19 percent.
Vintage was a big consideration, too, he says. The pandemic led to the worst year on record for Canadian real estate in 2020. The MSCI/REALPAC Canada Property Index tracked a negative 4.12 percent return on the year. Transaction volumes fell 22 percent year over year to $28 billion, according to the brokerage CBRE.
The industry has surged back, with record transaction volumes of $14 billion and $15.8 billion respectively, in Q2 and Q3 2021. Yet the flurry of investment activity was mostly concentrated on low-risk assets, Lawrence says. That provided an opening for LaSalle that resonated with investors, which wanted to cash in on the recovery, he explains. With CIG Advantage, LaSalle will focus on traditional value-add investments, which the firm believes will achieve outsized returns because others have been so risk-averse.
“For operators that typically get money from institutional investors and pensions, all the taps were pretty much turned off, because no one really wants to invest in anything that’s risky,” Lawrence said. “Suddenly, there’s a lot of people with opportunities, and no traditional sources of capital. So, we’ve found this very fertile ground.”
Growth and constraint
Canada has led the G7 in annual population growth rate for all but one of the past 20 years, according to World Bank data.
Much of that growth has been driven by immigration and is concentrated in Canada’s six biggest cities: Toronto, Montreal, Vancouver, Calgary, Edmonton and Ottawa, which are growing faster than their US counterparts. Metro Toronto, for example, has nearly quadrupled the growth rate of Metro New York over the past three years.
Canada’s supply of key property types has not kept pace with this growth. The vacancy rate for industrial properties in Toronto, Montreal and Vancouver is less than 1 percent, according to LaSalle’s research. Meanwhile, the tightest US markets – Los Angeles and the Inland Empire – are around 1.5 percent each, followed by Central New Jersey at more than 3 percent. In Canada’s top logistics markets, this has led to rental growth rates that are double those of their US rivals.
On the housing front, Canada has the fewest private dwellings per capital within the G7, at 424 per 1,000 persons, according to data compiled by Scotiabank.
“There are themes that we can take advantage of right now in terms of extremely low vacancy and extreme rent growth in a very liquid market,” McKinlay says.
Increasing competition
Other managers have taken notice of the opportunity set in Canada.
Fellow Chicago firm Harrison Street launched Canada Alternative Real Estate Fund, a core strategy, last year. On the other end of the return spectrum, Toronto-based Slate Asset Management began raising its second Canada-focused opportunity fund in 2020 with a target of C$450 million. Blackstone has been active too, most recently buying the logistics REIT WPT Industrial for $1.86 billion last year.
Still, Lawrence believes LaSalle has an advantage because of its relationships with the country’s public pensions. As those institutions look to reduce their domestic exposures, LaSalle has positioned itself absorb their non-core assets.
“We’re very well connected to the institutional ownership and private ownership (in Canada),” Lawrence says. “We’re able to access and provide a solution for institutions that are trying to quietly, without a lot of fanfare or publicity, jettison some of their assets that are capital intensive or have a [higher-risk] profile.”
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