The real estate silo has become an outdated model

This week, the Ontario Teachers’ Pension Plan and its real estate investment arm, Cadillac Fairview, announced a major overhaul: after 25 years investing in the asset class through a standalone subsidiary, the Canadian pension plan would be taking its real estate investment activities in house.

Ontario Teachers will be bringing Cadillac Fairview’s international team of 37 real estate investment professionals inside the organization and will launch a search for a global head of real estate. The investor is aiming to have the new operating model in place by January 1, 2024.

Meanwhile, Cadillac Fairview will remain a separate entity, but will only manage Ontario Teachers’ Canadian real estate assets – which encompass 38 million square feet of retail, office and mixed-use space – going forward. The Canadian pension plan has also appointed Salvatore Iacono, currently executive vice-president of operations, as the new president and chief executive of Cadillac Fairview, effective November 1. He will replace current CEO John Sullivan, who is retiring after 25 years at Cadillac Fairview.

PERE understands that Sullivan’s retirement was part of the impetus for changing the pension plan’s real estate operating model now. But the integration of standalone real estate subsidiaries into their Canadian pension parents has been a long time coming.

As Bill Tresham, former president of Ivanhoé Cambridge, the real estate subsidiary of CDPQ, told PERE this week, “the people that have the separate units are now the fossils of the industry.” Indeed, integration has been and continues to be a topic of conversation at Canadian pension plans with separate real estate subsidiaries, PERE understands.

The majority of these subsidiaries were established in the early years of real estate’s institutionalization as an asset class: Ontario Teachers acquired Cadillac Fairview in 1999, OMERS bought Oxford Properties in 2001, while CDPQ purchased predecessor entities Ivanhoe and Cambridge in 1990 and 2000, respectively, before merging the two businesses to create Ivanhoé Cambridge in 2001.

The original reasons for establishing separate entities had to do with allowing real estate teams to make quick investment decisions and to receive competitive pay. But that rationale no longer applies today. Canadian pension plans are known for having some of the highest-paid investment professionals in the pension fund world, and have proven to be capable of acting quickly in real estate investing, with weekly or biweekly investment committee meetings and investment professionals bestowed with decision-making authority.

In fact, Ontario Teachers believes integration will further facilitate real estate investment decision making by better enabling the pension plan’s various asset groups to share information, deal sourcing and best practices, the investor noted in its announcement this week.

Stéphane Jalbert, head of Europe and Asia-Pacific real estate investments at Canadian pension fund manager PSP Investments, which has an in-house real estate platform, concurred. “I think it makes sense for multi-asset-class pension funds to have in-house real estate investing capabilities, as they could benefit from internally generated research and insights affecting investment strategies, as well as broader global relationships,” he told PERE this week. “As the world becomes more volatile, that knowledge can accelerate investment allocation decisions.”

And whereas it made more sense to create silos when real estate was less established in the institutional world, the asset class now represents a significant allocation in many Canadian pension plans’ portfolios. The nine Canadian public plans on PERE’s 2022 Global Investor 100 ranking have real estate allocations ranging from 8.3 percent for the Healthcare of Ontario Pension Plan and 16 percent for OMERS, with seven of the nine allocating 10 percent or more. However, HOOPP calculates its real estate allocation as 15.7 percent, based on net investments instead of total investments.

Other reasons for integration include better alignment, as some Canadian pension plans have come under fire in recent years for governance issues relating to their subsidiaries. Growth potential is another important consideration, particularly for Ontario Teachers, which had net assets of C$247.2 billion ($185.4 billion; €170.9 billion) as of December 31 and is targeting C$300 billion by 2030.

Among the top 25 global pension funds by compound annual growth rate from 2013 to 2022, Canadian pensions with in-house real estate businesses clinched two of the top three spots: first-place CPP Investments, with a CAGR of 10.9 percent, and third-place PSP, with a CAGR of 9.8 percent, according to CPP’s fiscal 2023 financial results overview.

Canadian pension plans could justify establishing standalone real estate subsidiaries during the early days of the institutionalization of the asset class. But it is harder to make the case for keeping these silos today.