Since diversifying into property in 2003, Toronto-based Canadian Pension Plan Investment Board (CPPIB) has become one of the most active real estate investors in the world. The pension, which currently owns about CAD$18 billion (€13.96 billion; $18.13 billion) in the asset class, reached its highest real estate investment volume to date in fiscal 2012, pumping CAD$5.4 billion into 29 new acquisitions. Fiscal 2013, which began in April, also is shaping up to be a robust year, with at least CAD$3.34 billion in 9 transactions so far. These deals include an $890 million North American industrial partnership with Australia’s Goodman Group and most recently, a joint venture with Global Logistic Properties to acquire two industrial portfolios in Brazil.
CPPIB, which invests in real estate primarily through joint ventures, has built its investment track record on getting into markets early. Much of its real estate investment activity has been focused on the Americas, which currently accounts for 55 percent of its portfolio in the asset class. The region includes the pension plan’s two largest real estate markets, the US and Canada, as well as Latin America, where it has been growing in Brazil and is considering expansion into other countries.
“We are looking not where the market is today, but where the market is going to be in the future,” said Peter Ballon, head of real estate investing in the Americas at CPPIB, in the pension plan’s first interview with PERE. “And in that respect, we are looking at any market that we think will have both scale and attractive growth parameters.”
Ballon expects to continue to see interesting opportunities throughout the fiscal year, including those in US multifamily development, where there’s less competition with respect to capital, as well as in Brazil. “That is a market where you need to have a longer-term horizon and be willing to accept short-term risk, and you also have to be an unlevered buyer, because debt is very expensive there, so we have a competitive advantage in those markets,” he said.
Despite being a heavyweight investor, CPPIB has adopted a very fluid approach to where it puts its real estate capital. “We don’t have allocations, we don’t have any requirement to invest, so we let the market tell us if we’re going to be active,” said Ballon. “If we see very attractive risk adjusted returns, we will invest, as was the case last year. If the market gets overheated, and the returns aren’t attractive, we won’t make any investments.”
A prime example of this is the US, where CPPIB began making real estate investments in 2008, at a time when most other investors were sitting on the sidelines. “There’s no doubt that the last few years have been attractive times to acquire property in the US,” he said. The pension plan started first in the office sector, purchasing several buildings in New York and Washington, DC to take advantage of attractive pricing post-Lehman.
CPPIB’s next investment phase was in retail, which is currently its largest US real estate sector, with interests in approximately 25 malls, followed by multifamily, which was a beneficiary of the housing crisis. Most recently, it expanded into industrial, by way of its partnership with Goodman.
But pricing appreciation in the US has made it increasingly difficult to hit hurdle rates and may lead the pension plan to eventually look more to other markets.
“While the US might be getting expensive, Europe is now looking like there could some interesting opportunities for us,” said Ballon. CPPIB also has been actively pursuing other investments around the globe, particularly in Asia and Australia. “That might one day result in no investment in the US, which is just fine with us.” He added, “what we’re trying to do is not follow the trends of everybody else, but we’re trying to be one step ahead.”
A return decision
In November, CPPIB, along with the Government of Singapore Investment Corporation and China Investment Corporation, backed Global Logistic Properties’ acquisition of two logistics portfolios in Brazil from Hemisferio Sul Investimentos. The pension plan committed a total of $343 million to the transaction, which gave it a 39.6 percent ownership stake in a portfolio of five development projects in the state of São Paulo and an 11.6 percent interest in a 13.7-million-square-foot portfolio of stabilised assets in the Southeast region of Brazil. Returns drove the pension plan’s decision to take a much larger ownership stake in the development portfolio than in the stabilised properties.
“We felt that the development gave us very attractive risk-adjusted returns,” said Ballon. “With the stabilised portfolio, while an incredibly high-quality portfolio, the returns weren’t quite as an attractive. So we intentionally took a smaller piece of that.”