REITs to lead deal making activity in 2013, Real Capital

Attendees of this week’s Real Capital conference in Toronto were told that the commercial real estate sector should look in 2013 like a mirror image of 2012.
That mirror image prediction also seems to hold true when it comes to just who will be leading the acquisition charge this year when it comes to the competition for properties between REITs and pension funds.
“The REITs probably have a little more flexibility given that they are focused on after-debt returns and that they are looking for accretion,” said Sharm Powell, Director of Real Estate Investments, with the CPP Investment Board. “I do think they will be very successful if they want to be on a certain asset.”
Her assessment was echoed by fellow panelists who were addressing the subject of how REITs, pension funds and private equity will approach the market in 2013.
Powell’s nod to the REITs should not be taken as an indication that the huge pension fund, which “has more money than God,” in the words of one panelist, will be quiet in the current year.
The quiet giant
CPP, which manages the pension benefits of 18 million Canadians, had assets last year of $172 billion. That sum is expected to grow rapidly to $290 billion by 2021 and more than $450 billion by 2030.
CPP is a sizeable real estate investor, with approximately $21 billion invested in the sector currently, comprising about 12% of the total fund, Powell said. That number has been rising rapidly.
“Out of that $21 billion, about $11 billion, over 50% of it, was actually invested over the last 24 months,” she said.

Image Source: CPP Investment Board website impage illustrating the portion of the fund invested in real estate
What does CPP like? Retail, office, industrial and multi-family residential. Retail comprises about 45% of its portfolio, followed by office. It’s holdings have a close-to-home bias, 60% of real estate is in the Americas, with 20% in Europe and Asia/Australia each.
As befits its size, CPP buys big. “Because of the size of our fund, we tend to focus on bigger, chunker investments. Our sweet spot is between $100 million and $1 billion.”
Because CPP does not own an operating platform in the form of a real estate company, CPP’s model calls for it to partner with strong operators. “Our perfect JV is a 50-50 with a group like Oxford,” Powell explained, nodding to fellow panelist Eric Plesman, Senior Vice-President of Investments for Oxford Properties Group. (CPP clearly does not mind that Oxford is owned and controlled by the smaller, but still enormous, OMERS pension plan.
Patience pays for CPP
Powell noted that CPP has a very different approach to investing than most pension plans around the world. It’s $172 billion is fully invested, either passively or actively, and it does not have any set asset allocations for sectors such as real estate.
That makes it a very patience investor, she noted. “What we do is try to focus on our scale, the fact that we have certainty of assets so we can undertake longer development projects because we know that we can fund them (and) we can undertake complex transactions that take a long time to do,” she said. “The Westfield transaction (US$4.8-billion joint-venture to build 10 regional malls) that we closed last year took us about 14 months but we had the internal capability because we have the 50 people internally to undertake complex transactions.”
Low rate environment tough on PenFunds
Powell noted that the current ultra-low interest rate environment is making it difficult for pension funds like CPP to compete price-wise with leveraged buyers. “From our longer term perspective, it is hard to make sense of that type of pricing.”
While low rates may currently be giving the REITs an advantage over pension funds generally, they have a high bar to hurdle, said the CPP executive. “You are buying from the perspective of your unit holders and what is important to them, near and medium-term accretion is probably at the front of the list, but so is liquidity, so bigger is better and then you have to start balancing pure play versus diversified.
From our perspective it is much more straightforward. We really have a single focus on delivering long term investment returns that make sense risk adjusted for our beneficiaries.”



Paul is a writer, editor and media trainer based in Toronto with over 25 years of experience as a business reporter. He has written for Canada’s major news services on…

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Paul is a writer, editor and media trainer based in Toronto with over 25 years of experience as a business reporter. He has written for Canada’s major news services on…

Read more




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