On the 15th floor of the Canada Pension Plan Investment Board’s New York offices at 510 Madison Avenue, Peter Ballon points to a set of windows in the building across the street. “What do you see?” he asks.

The windows in question show a dental practice inside. But, as Ballon explains, that is not the answer he is looking for when he makes the same inquiry to potential hires. The right response? “It’s underutilized prime real estate.”

It is a question that Ballon often asks these days, as he is now effectively running the property business of the country’s largest pension fund. In May, he was promoted from head of real estate investments in the Americas to head of investments, real estate. In his new role, Ballon is responsible for all of the pension plan’s real estate investments globally and chairs its real estate investments committee.

Meanwhile, the pension plan elevated Graeme Eadie, previously senior managing director and global head of real estate investments, to global head of its newly formed real assets department, which includes real estate, infrastructure and agriculture. Ballon’s promotion, however, was not tied to Eadie’s changing role, but rather the evolution of the real estate team.

With C$37.2 billion ($28.11 billion; €26.69 billion) in real estate assets currently, CPPIB is one of the dominant global investors in the asset class. Only Abu Dhabi Investment Authority, Stichting Pensioenfonds ABP and Qatar Investment Authority have more property holdings worldwide, according to PERE’s 2016 Global Investor 30 ranking. And much of its rise to dominance has occurred in recent years – its property assets tripled from C$10.9 billion to C$30.3 billion between fiscal year-end 2011 and fiscal year-end 2015.

Today, real estate is one of the strongest-performing asset classes for CPPIB. At the end of its 2016 fiscal year in March, it generated a return of 12.3 percent, second only to private emerging market equities (17 percent). The return for CPPIB’s total investment portfolio was 3.7 percent. Its fiscal 2016 return for real estate, however, was its second-lowest in the past five years, after fiscal 2013, when the asset class returned 9.2 percent.

CPPIB, which invests the funds of the Canadian Pension Plan on behalf of 19 million contributors and beneficiaries, is fully funded. In fact, CPPIB is projected to have net inflows until 2021, after which a small portion of investment income will be required to pay benefits, according to Canada’s Office of the Chief Actuary. As part of real assets, commercial real estate is viewed as offering the institution income streams that typically rise with inflation and tend to match the pension plan’s inflation-linked liabilities.

“We still have incoming inflows from our stakeholders, and that makes us much more flexible to be focused on total returns than immediate cash returns from our investments,” Ballon says. “So that gives us a different universe of opportunities to pursue.”

Active and proactive
The real estate team at CPPIB looks starkly different today than when Ballon first came aboard in 2007. At the time, the pension plan had been investing in the asset class for four years, with a real estate portfolio worth $5.7 billion, and handled all of its investments globally from its Toronto headquarters.

Today, the organization’s real estate group sits in six offices around the world – Toronto, London, Hong Kong, New York, São Paulo and Mumbai – the last three of which opened in just the past two years. The team, which was approximately 15-strong when Ballon joined, now exceeds 80 investment professionals globally.

In March, Hilary Spann, formerly a top real estate acquisitions professional at JPMorgan Asset Management, joined as CPPIB’s first head of US real estate investments. Meanwhile, Marcela Drigo was recruited from Clarion Partners in June to become CPPIB’s first head of real estate in Brazil.

“What you’re seeing is an evolution,” says Ballon. “We’re now approximately C$40 billion of investments and our direct investment business necessitates us being closer to our real estate.”

And while the real estate group’s geographic expansion has typically been executed in tandem with that of the overall CPPIB organization, the property business has in many cases taken the lead in the opening of new offices, such as New York and São Paulo, he adds. “Real estate in particular has probably been the most active and proactive of all the investment groups,” observes Ballon.

When planting its flag in new markets, CPPIB intends to stay entrenched in those jurisdictions. “When they make a decision to be somewhere, they’re committed, it’s not in and out – certainly not in when’s it trendy and out when it’s rocky,” says Thomas McDonald, managing partner at New York-based investment manager Jaguar Growth Partners, which is a co-shareholder with CPPIB in Aliansce Shopping Centers, a Brazilian shopping mall company. “They’ve weathered the last tumult in Brazil relatively well. In fact, they doubled down in their investments at a time when others were hesitant or not as committed. Certainly, that has something to do with their capital profile, which is long term and allows them to ride out the storm.”

But in getting boots on the ground in various regions around the world, CPPIB is looking to get close to not just its real estate assets, but its real estate operating partners as well.

“When we are joint venturing with operating partners, we are focused on finding the operators and developers that are the best at what they do in their sector,” says Spann. “We really spend a lot of time getting to know our partners ahead of making an investment with them, everything from the assets they own, who their executives are, what their operating model is, what their culture is like. We spend a tremendous amount of upfront time trying to make sure they’re the right fit for us, and that they have the ability to scale with us. It’s important for us to be able to invest in scale for our program to be successful.”

Spann, however, stresses the distinction between operating partners and managers: “When I think of managers, I think of investment advisors, and we don’t work with investment advisors. We go direct with operating partners because we have the capability of investment managing our assets ourselves. We find it makes for efficient decision making, to be side by side with our operating partners on any individual deal. Whether it’s a strategic matter, a lease or a financing or a sale, it makes a lot of sense for it to be just the two of us in a partnership.”

Also, unlike a third-party manager, an operating partner has a significant amount of equity in the transaction – typically more equity than CPPIB, Ballon adds. For example, the pension plan’s average ownership stake in a transaction in the Americas is 42 percent, compared with an average of
47 percent for their partners.

“It gives us an additional level of comfort,” says Ballon of partners having a significant amount of skin in the game. “It’s not a coincidence that some of our partners are some of the largest operators in the sector.”

In the US, those partners are Simon Property Group, Westfield, Kimco Realty and General Growth Properties in the retail sector; Vornado Realty Trust, SL Green Realty and Hudson Pacific Properties in office; AMLI Residential, Essex Property Trust and AvalonBay Communities in residential; and Goodman Group and Global Logistic Properties in industrial.

CPPIB’s first preference is to build upon its relationships with existing partners, Ballon says. Even as it enters new markets and new sectors, the pension plan often endeavors to do so with firms with which they have already invested. For example, the institution previously had joint ventures with Goodman in Australia and China, and GLP in Japan and Brazil before entering the US industrial real estate market with the two firms. CPPIB’s alliance with its largest real estate partner in the US, Westfield, started out as a smaller relationship in the UK.

In some cases, CPPIB has needed to add new firms to its partner base, such as when it entered the US senior housing and student housing sectors last year. In February, the institution acquired a six-property senior housing portfolio in Florida in a joint venture with Welltower for a total of $555 million. A month earlier, CPPIB, in partnership with GIC and The Scion Group, formed a student housing joint venture entity, Scion Student Communities to purchase a student housing portfolio in the US for approximately $1.4 billion from InvenTrust Properties.

But while these outlays are sizeable, CPPIB has proven to be a desirable real estate partner, for reasons that go far beyond its sizable checkbook.
“CPPIB has become the capital partner of choice,” says Ming Mei, GLP’s chief executive. “What sets them apart is that they have built a standout team all over the world. They find people that have very similar values – values that are also very important to us at GLP: smart, driven and entrepreneurial-minded, yet know how to have fun and not take themselves too seriously.”

McDonald says: “They’re collaborative. They have their views and they have their experiences, but they are willing to work with partners. It makes them a better partner, a more attractive partner. With other groups, it’s my way or the highway.”

In agreement is Blake Hutcheson, chief executive of Oxford Properties Group, which has been investing with CPPIB since 2005. In September, CPPIB acquired a 50 percent interest in a portfolio of office properties in downtown Toronto and Calgary from Oxford for C$1.175 billion “The deal is living proof that the road to success in real estate is built on great relationships,” he says.

Of the CPPIB real estate team, he notes: “Peter is a very quick study, his word is his bond and you always know where you stand with Peter and his team.”
Meanwhile, Spann – with whom Oxford worked on a co-investment in Boston while she was at JPMorgan – “is an extremely smart and focused real estate investor.”

And although CPPIB and Oxford Properties – the real estate subsidiary of the Ontario Municipal Employees Retirement System – are both Canadian pension plans, they complement each other as partners, he adds. “Oxford has been built around a full service platform where we both own and manage the vast majority of our portfolio,” he says. “CPPIB has taken a more traditional approach of investing with and alongside others, without a management platform. It is for this reason that we have been natural partners with a consistent long view. Their ambitions have taken them to many global markets that our own platform business has not gone, so frankly we don’t compete with them very often.”

Divergent investments

Despite its strong preference to invest in real estate through joint ventures, CPPIB has diverged from this approach with two recent investments. In March 2015, the pension plan acquired 100 percent of UK student accommodation provider Liberty Living for £1.1 billion from the Brandeaux Student Accommodation Fund. The transaction marked not only CPPIB’s entry into the UK student housing sector, but also the first time it made a real estate investment without a partner.

“In a perfect world, we like to find a JV partner,” Ballon says. “We couldn’t find one in student housing. It was a very, very attractive, compelling opportunity, and we thought very highly of the existing management team. We recognized that we couldn’t achieve our JV platform model, and we decided to acquire the platform 100 percent.”

Liberty Living was also a different type of investment in that the management platform of the business was effectively CPPIB’s partner. “We’ve set up a structure to almost treat it like a JV,” says Ballon. “We try to replicate that, which includes recognizing that our skills in our investment teams are capital allocation and partner selection. Similarly, our operating partners, or in this case, the managing team of Liberty Living, are the ones with the expertise to operate that business. So we try to draw that line that we don’t become the operator.”

CPPIB also deviated from its joint venture model in October, when it invested $375 million in Raffles City China Investment Partners III, Singapore-listed real estate company CapitaLand’s third development private investment vehicle in China. CPPIB’s investment represents a 25 percent stake in the vehicle.

Ballon, however, does not consider the investment to be a typical fund investment. “Funds have a connotation to them, that the investors have limited discretion over investment decisions,” he says. “We have a considerable amount of discretion over that investment. That’s really the thesis. We want to control how our investments are managed.”

Adds Spann: “Where our preferred structure is not available to us, we’ll consider an alternative investment structure. If we see an opportunity that makes sense for us, we’re flexible about the structure.”

Risk payment
One of the few criticisms that has been raised about CPPIB is related to its large size. “They’re bureaucratic, so by definition, they’re not going to be agile,” says one industry insider. “They have even said, ‘We’ll catch ourselves not making the right decision quickly enough,’ but they’ll wait for the next time around to make up for that.”

Although the pension plan is considered by some to be “careful and cautious,” CPPIB does not shy away from risk when investing in real estate. “In general, we are looking to get paid to take risk,” says Spann. “I would say our return objectives are consistent with our investment strategy, which is to invest in the value-add space. From my perspective, you have to price the return to the risk in the transaction.”

To do so, the institution often seeks opportunities that result from market dislocations. For example, the deal with Oxford was largely a play on the Calgary property market, Ballon notes. “Calgary is, over the long term, an attractive market,” he says. “Having said that, there’s no doubt that it’s proven to be a cyclical market over the years. It’s very closely correlated to oil prices, and we saw, with oil prices being somewhat depressed, that it was an opportune time to invest.”

Similarly, market dislocation has also attracted CPPIB to China, where in addition to its CapitaLand investment, the organization bought a 49 percent interest in the Chongqing West Paradise Walk shopping center in the city in October and 40 percent interest in the Pavilion Dalian shopping mall in Dalian from the Pavilion Group in November. “Some investors are a little less confident in China, and so pricing has become a little bit more attractive for us,” says Ballon.

Another theme has been opportunities outside of the traditional real estate sectors of office, multifamily, retail and industrial. “As the more traditional core real estate has become more fully priced as the cycle advances, we’re starting to look at asset types that are showing secular strength,” says Spann. Indeed, CPPIB has been particularly active in both student housing and senior housing over the past 18 months, though non-traditional property investments currently account for less than 25 percent of the pension plan’s real estate portfolio.

Ballon notes that CPPIB has remained a net buyer over the past six months, during which time it has scooped up some $3 billion of real estate assets. At the same time, it has seen nearly $2 billion returned to the organization over the same period, through a combination of dispositions and distributions. One notable exit was the pension plan’s sale of a 45 percent interest in 1221 Avenue of the Americas to China Investment Corporation for $1.03 billion in December.

“We invest with the intention of holding indefinitely,” says Ballon. “Having said that, we are a very active seller, because we recognize that investments constantly need to be reviewed, and sometimes, for a variety of reasons – it can be real estate specific or market specific – it’s time to sell. And sometimes the market is willing to pay you a lot more than what you think it’s worth.”

Ultimately, when it comes to smart real estate investing, it’s all relative, Ballon says, adding that one of the most common misconceptions is the belief that all pension funds are the same.

“We’re all very different and that’s why a very smart investment for us may not be as smart for somebody else and vice versa,” he says. “So it’s not a matter of a good deal or a bad deal in an absolute sense. It has to be a good deal for who’s investing.”