Commercial real estate investment manager Bentall Kennedy has unveiled a new real estate fund that taps into a growing, untouched investor base— defined contribution (DC) plans in Canada. Developed in partnership with Sun Life Financial, Canada’s largest DC plan sponsor, the Canadian Real Estate Plus Fund gets its exposure to direct real estate through Bentall Kennedy’s open-ended core offering, the Prime Canadian Property Fund. Since its inception in 1983, that fund has amassed some $2.8 billion in assets.
Although some life insurance companies in Canada offer in-house direct real estate products to their DC clients, this is the first partnership of its kind between a private fund manager and an insurance provider in the country. Bentall Kennedy has had the strategic objective of developing an option for DC plans for more than two years as such pensions have been steadily rising in popularity over traditional defined benefit (DB) plans, accounting for some 45 percent of worldwide pensions in 2013 compared to 40 percent just five years ago.
“We don’t see the defined benefit market going away at all,” Gary Whitelaw, chief executive officer of Bentall Kennedy, told PERE. “But as defined contribution plans grow in scope, we see it as a new opportunity.”
While Bentall Kennedy’s solution is breaking new ground in Canada, American insurers and financial institutions have been pursuing the DC investor base for some time now. The Defined Contribution Real Estate Council (DCREC), a group that promotes the inclusion of direct commercial real estate investments and real estate securities within DC plans, is comprised of some of real estate’s biggest players, including Bentall Kennedy, TIAA-CREF, Principal Real Estate Investors, UBS Global Real Estate and Prudential Real Estate Investors. Many members are pursuing strategies similar to Canadian Real Estate Plus (TIAA-CREF has had such a strategy since 1995), but Bentall Kennedy distinguishes its product through its collaboration between a seasoned fund manager and an insurance provider.
When offering direct real estate investment opportunities to DC plans, the biggest concern is ensuring liquidity, which Bentall Kennedy plans to provide through a multi-asset structure. Canadian Real Estate Plus functions similarly to a mutual fund as a variable annuity contract, in which the value of the contract is determined by a pool of assets held by the insurance company. For every dollar contributed to Canadian Real Estate Plus, 70 percent to 80 percent will go towards the Prime Canadian Property Fund, which invests in income-producing office, industrial, retail and multifamily properties in major Canadian markets. The ‘Plus’ in the fund’s name refers to the remaining 20 percent to 30 percent, which will be invested in exchange traded fund (ETF) units tracking a REIT index, cash and cash equivalents.
According to Whitelaw, the ETF securities will provide passive exposure to a widely recognized Canadian REIT index, while the direct real estate investments will allow for the kind of stable returns and value appreciation to which Sun Life’s DC plans have not been exposed in the past. “People are essentially getting returns that track the performance of the underlying real estate, but with a little more liquidity and a little bit less income,” he said.
“This product’s structure is consistent with offerings currently provided by the most-sophisticated, forward-thinking institutional fiduciaries in the market today,” said Ben Adams, chairman emeritus of the DCREC and chief executive officer at Ten Capital Management. Adams also noted that, if the DC market’s annual growth rate remains at its current nine percent pace, total assets could breach $4.2 trillion next year.
A Hewitt EnnisKnupp’s report, entitled “Alternative Assets: The Next Frontier for Defined Contribution Plans” and published in September, corroborates this growing trend. The paper highlights the benefits of DC plan sponsors adopting such assets as hedge funds and real estate and explains how fund managers might provide this option through target-date funds (mutual funds that automatically reduce risk as the investor reaches a target date, typically retirement) and diversified multi-asset port-folios. The report concludes: “New products and approaches have raised the bar, and many plan sponsors would be well-served to reconsider the role of alternative assets in their DC plans. Over the next few years, we expect alternative investments to become much more mainstream in DC plans.”
Bentall Kennedy’s fund is an example of one of those new products that has “raised the bar.” As opposed to the financial institutions and insurance companies, which traditionally have been the ones to provide real estate options to DC plans, Bentall Kennedy’s Canadian Real Estate Plus Fund can function as a blueprint for other fund managers looking to take advantage of the DC market.
As of this quarter, the 4,500 DC plans sponsored by Sun Life have the option to offer Canadian Real Estate Plus to its members. Further down the road, Bentall Kennedy may seek to offer the fund to other DC plan sponsors, but that is not a priority now. “Our focus is on launching this properly and developing a strong track record,” Whitelaw said. “For the moment, we want to do this right with Sun Life.”