It appears as though Canada is looking to invest more in real estate. Indeed, a number of small and mid-sized Canadian pension plans are looking more towards alternative investments, including real estate, to boost returns in a slow growth environment, even though a few have expressed concern about the prohibitive costs inherent to establishing a new internal investment programme.
Overall, figures from Statistics Canada reveal that Canadian pension plans, both big and small, have increased their allocations to real estate by an average of 2.2 percent in the first quarter of 2012 from the year-earlier period. Again, this isn’t just the smaller-sized plans.
For example, the Canada Pension Plan Investment Board (CPPIB) saw the value of its real estate portfolio mushroom by $5 billion during its latest fiscal year, and Caisse de dépôt et placement du Quebec – through its real estate arm, Ivanhoé Cambridge – has been virtually relentless in its real estate investment activities this year. Meanwhile, the Ontario Municipal Employees’ Retirement System’s real estate subsidiary, Oxford Properties Group, recently unveiled plans for a massive $3.1 billion mixed-use complex in downtown Toronto.
With many of the larger pension plans ramping up their real estate activities, many of the smaller plans are beginning to see the appeal of the asset class.
“There’s definitely more interest in core real estate from the small to mid-sized funds,” said Malcolm Leitch, chief operating officer for investment management at Bentall Kennedy. “When you look at fixed-income returns, they’re not going to make their return requirements. Canadian real estate has weathered the financial storm really well, so pensions are giving core real estate a second look.”
Indeed, the returns found investing in Canadian real estate are becoming increasingly attractive over other asset classes. A report from the Canadian Investment Review reveals that, over the past 15 years, real estate provides an annualised risk-adjusted return of nearly 12 percent, compared to an annualised return of 9 percent from bonds and a 7 percent return from stocks.
A survey from RBC Investor Services confirmed this. Nearly half — 48 percent — of the 56 Canadian pension plans that responded to RBC Investor Services’ pension quick poll said they planned to increase their allocation to alternative assets, which is more than double the amount from last year. Specifically, 45 percent of respondents planned to add real estate allocations over the next 12 months.
Of course, Canadian real estate is very competitive due to the market’s limited size. As a result, many Canadian pension plans are looking to invest not just in their own backyard but abroad. CPPIB upping its investment in its joint venture focused on developing properties across China by $400 million and Ivanhoé Cambridge investing $234 million in two multifamily assets in California’s Silicon Valley are two recent examples of Canadian investors reaching out beyond local real estate. (In fact, if you check the accompanying Global Investor 30 supplement, you’ll note a number of Canadian pension plans have made the ranking, due in no small part to their increased global activities.)
Ultimately, Leitch told PERE that Canadian LPs are continuing to find real estate a strong alternative to previously popular asset classes and will continue to do so, provided there are no major surprises on the horizon. “If interest rates remain low, you’re going to see continued interest in core real estate,” he added.