With single digit returns in Canadian real estate investment and a scarcity of new opportunities, Ivanhoé Cambridge is increasingly turning to foreign development opportunities for higher yields.
Ivanhoe owned by Quebec pension fund Caisse du Depot du Quebec has a $4.3 billion dollar development pipeline of which 60% is in Canada, 17% in Brazil, 10% in the U.S., 7% in Paris and the remainder in other countries explained Paul Gleeson, Executive Vice President, Development, Ivanhoé Cambridge at last weeks Global Property Market Forum in Toronto. Profits in excess of 20% for development projects in Canada and abroad means we can expect it will remain a central part of Invanhoe’s strategic plan.
There are good development opportunities for Ivanhoe in Canada for the next three to five years however after that they will have been used up. Available green field development projects will be completed, re-development in retail properties will be largely built out and office development in Canada will be very selective explained Gleeson. “To grow the portfolio we have no choice but to look outside Canada,” he said.
The shift to pursuing foreign development opportunities also reflects the distribution of assets within Ivanhoe’s real estate portfolio which are 50% in Canada, 23% in the US, 20% in Paris and 7% in other countries including Brazil.
“We like the U.S. and Ivanhoe will expand there however it is a crowded market for the type of product that Ivanhoe is after. We like certain emerging markets particularly Brazil” said Gleeson.
In Brazil Ivanhoe’s investments will soon be up to $2-billion where Gleeson attributes their success to its partnership with shopping center manager Ancar. The partnership has allowed them to realize development opportunities in Brazil with the same level of confidence as they would experience in Canada.
Ivanhoe has learned that it cannot transfer expertise to a foreign country and conduct business in the same way as in Canada. “We feel we need a local partner who understands the market and the various nuances associated with it” said Gleeson.
“Creating a platform the way we have in Brazil is the way to go Global”, said Gleeson. In China Ivanhoe has a similar platform to the one in Brazil and continues to explore opportunities there as well as in Paris.
Cross border investment exceeds domestic in third quarter
Ivanhoe Cambridge decision to shift its investments outside Canada is part of a trend toward foreign investment that we can expect to continue according to Brett Miller, CEO of Jones Lang LaSalle in Canada. Several speakers at the Toronto Real Estate Forum noted that for the first time in the third quarter of 2012 cross-border flow of Canadian capital exceeded domestic investment as illustrated by JLL’s chart shown below.
Pension funds growing their real estate allocations
Another significant trend raised at the Toronto Real Estate Forum is the expectation that pension funds are going to increase their allocation to real estate to as much as 50% within their investment portfolio. This point made was by two prominent executives at the conference Bruce Flatt, CEO of Brookfield Asset Management and Black Hutcheson, CEO of the Oxford Properties Group.
How the Canada Pension Plan Investment Board (CPPIB) reaches its real estate investment decisions was explained by Peter Ballon, vice president and head of real estate investments in the Americas for CPP. “The investment strategy is not handcuffed by specific investment allocations which means (CPP is) looking around the world for the best opportunities.”
“We don’t ever have any cash sitting on our investment sheet, it gets fully invested in what we call a reference portfolio – a portfolio that we think will outperform a certain market that has a blend of equity and debt” said Ballon.
“The job of real estate is to take that capital and outperform what passive capital would do. That is very much our mandate on a risk adjusted basis, to take that capital and do something better with it.”
“What that means in today’s environment where it has been acknowledged that there is a lot of capital going towards core properties and core markets – it plays to our strength – in that our investment philosophy is to be more of a capital allocator than an actual real estate operator.”