The Canada Pension Plan didn’t become one of the best-funded pension plans in the world – it’s got enough assets to fund our retirements for at least the next 75 years – by simply handing over current workers’ contributions to retirees.CPPIB has been very active in real estate, scooping up shopping malls which now account for almost half of its real estate portfolio. Real estate is a key asset class for pension funds, typically delivering stable returns throughout all market cycles. This is one of the key reasons why pension funds are increasing their allocations to real estate.
If that were the case, the bulge of baby boomers tapping into the system in the next few years would mean there would be nothing left for the workers of today and tomorrow when they eventually retire.
To avoid that kind of catastrophic shortfall, the CPP Investment Board was created in 1997 as an arm’s length organization that invests CPP funds not needed to pay current benefits. The CPPIB decreased the proportion of funds held in fixed equities and beefed up its holdings in public and private equities, infrastructure and real estate. Its assets now stand at $183-billion, with an annual return of 10.1 per cent for the year ended March 31, 2013.
Within its real estate portfolio, in the past nine months alone, the CPPIB has spent more than $860-million of Canadian’s pension money on buying interests in shopping malls around the world – two in Australia, one in Sweden and one in Britain. While the organization isn’t increasing the percentage of funds it allocates to retail real estate, it’s having to scoop up more properties just to maintain its current asset allocation.
Graeme Eadie, CPPIB’s senior vice-president and head of real estate investments, spoke with The Globe and Mail from his Toronto office about the fund’s recent shopping mall purchases abroad and why it probably won’t be picking up more Canadian properties soon.
As of March 31, the CPPIB’s real estate portfolio accounted for 10.8 per cent of its assets, of which nearly half, or $8.2-billion, was invested in shopping malls. Is that a position you’re comfortable with?
Being around 40 to 45 per cent retail is pretty typical for financial institution investors. The other major component [of a real estate portfolio] tends to be office, and the third, which is usually around 20 per cent, is the industrial sector.
What’s makes retail real estate an attractive investment?
Shopping centres tend to have a more stable income return [than the office sector]. That’s why they tend to be quite attractive for pension plans.
Typically, institutions like high-quality retail shopping centres and, as a result, they don’t trade very often. And one of the things that’s particularly attractive about them is the returns are quite stable. It’s really a reflection of the fact that you’ve got so many tenants in the building. Whereas with office buildings … the tenants tend to be larger within an individual building, so as they move around the marketplace you can end up with larger pieces of vacancy.
What did you like about your most recent investment, Bullring Shopping Centre, in Birmingham?
It’s a very high-quality centre in a good market. It’s really one of those centres that is very hard to find anywhere in the world and this one has a very strong, proven track record. It has all of the major tenants that you’d want to see in a shopping centre so it really dominates that trade area. It is in the effective downtown of Birmingham and well linked to the train station, which is just across the way.
So it has just about everything that you’d want: high-quality tenants, a strong location within the downtown, it’s well connected by public transport and has car parking attached to it.
We see it as a really good asset with long-term value.
How did the CPPIB come to purchase it?
There were three owners and one of the owners wanted to sell. We had a relationship with [British retail property company] Hammerson from other activities, and they called us and asked if we would like to share the interest with them.
Do you consider your shopping centre investments to be long-term investments?
Yes, we do. There’s a huge range of assets within retail, going from strip centres to grocery anchors to B-level malls to the very prime malls. I think that where we can find that prime mall that has all of those attributes [that we value] and has a strong manager, those are things that do not trade very often and therefore you want to buy them and hold them because they will perform well through all of the cycles. They are very valuable. There are other centres, which may be neighbourhood-oriented or, perhaps, in locations that are not as strong. Those we will look at and we might own them for eight or nine years and then find other opportunities and continue to trade up. But something like a Bullring, or a Macquarie Centre in Sydney, those types of assets really have that long-term attraction for us.
Do you foresee more international shopping centre purchases?
We’re always looking.
How about domestic purchases?
There’s very little that we see of that kind of quality that we’d want to add to the portfolio. There are select opportunities that come up from time to time but, obviously, Canada is a relatively small market and it’s quite concentrated in terms of its ownership.
What’s the shopping mall landscape like in emerging markets?
The story is basically the same in emerging markets as it is in the developed markets. But the one nuance I would point out is that, depending on how developed the country is, it can often take a little while longer for new properties to really settle into their trade area and for the customer to get used to shopping in an enclosed mall rather than what they may have done before, which may have been more department-store based or even open-market based. In terms of new development of retail facilities, the emerging markets are really the primary source for that type of product today. There’s not a lot of development going on within the major, developed countries.
This interview has been edited and condensed.
Recent CPPIB acquisitions
What: Bullring Shopping Centre.
Where: Birmingham, Britain.
How much: CPPIB paid $240-million for a 16.7-per-cent stake in the mall.
When: May, 2013.
Stores: More than 160 shops and restaurants. Anchored by Selfridges and Debenhams; other stores include Apple, Forever 21, Gap, H&M, Hugo Boss, Swarovski and Ugg.
What: Kista Galleria Shopping Centre.
Where: Stockholm, Sweden.
How much: CPPIB paid $177-million for a 50-per-cent stake in the mall.
When: December, 2012.
Stores: 180 shops and restaurants, including Adidas, Esprit, Foot Locker, H&M, Levi’s and McDonald’s.
What: Macquarie Centre and Pacific Fair Shopping Centre.
Where: Sydney, Australia, and Gold Coast, Australia.
How much: CPPIB paid $445-million for a 37-per-cent stake in AMP Capital Retail Trust, which owns 50 per cent of Macquarie Centre and 80 per cent of Pacific Fair.
When: October, 2012.
Stores:
Macquarie Centre: 250 shops and restaurants. Anchored by department stores Myer and Target; other stores include Athlete’s Foot, Esprit, Kookai, Nine West and Pandora.
Pacific Fair: More than 130 shops and restaurants. Anchored by Myer, Target, Kmart and Coles; other stores include Billabong, Crocs, Esprit, Foot Locker, Kookai, Quick Silver, Seafolly and Steve Madden.
CPPIB partners up with top-tier real estate investment managers to find deals around the world. There is intense competition for prime real estate assets. As discussed in a recent comment loooking at why the Caisse is selectively unloading European properties, CPPIB isn't the only large pension fund scooping up shopping malls. Ivanhoé Cambridge, the Caisse's real estate subsidiary, is slowly divesting assets including hotels to focus on residential units, office buildings and shopping centres where returns are more predictable.
And what about CPPIB's focus outside Canada? I think this is a very smart move. Canadian real estate executives are growing more anxious about the state of the market, which might explain the increasing tendency to look abroad. CPPIB recently teamed up with GE Capital Real Estate to invest in office buildings in Tokyo, which tells me they're bullish on Japan.
But looking abroad is getting more difficult as the renewed interest in commercial real estate among insitutional investors is intensifying competition for prime real estate assets. According to bfinance, the flood of money into some areas, whether geographic (London, Paris, Frankfurt) or strategy specific (core, inflation-linked long lease), is creating far greater risk on capital invested down the line than investors may realize in their quest for short term cash yield. The same concerns are being raised in New York City where commercial real estate is surpassing peak valuations.
Of course, these concerns are not an issue for CPPIB because unlike more mature pension funds, it's in an enviable position in terms of liquidity. This is why Mark Wiseman, CPPIB's president and CEO, and his senior managers, are sticking to their game plan to invest heavily in private markets throughout the world, believing this is where they will add significant returns over the long-run (see interview at end of my comment on CPPIB's FY 2013 results and read his recent ICD address on focusing capital on long term).
This doesn't mean that CPPIB will keep buying private market assets at any price. André Bourbonnais, head of private investments, said deals appear poised to taper off this year as many more competitors are looking for bargains with plenty of available cash and cheap credit to fund their investments. “If the environment remains as it is today, we’re going to be very selective,” he said.
Indeed, when it comes to real estate and other private market assets, insitutional investors have to be extremely selective in this environment of abundant liquidity and cheap credit. Remember the ominous warning of Tom Barrack, the king of real estate who cashed out prior to the previous real estate downturn: "There's too much money chasing too few good deals, with too much debt and too few brains." (Interestingly, Barrack is betting big on a U.S. housing recovery but other smart investors are exiting this trade).
Below, RFR Chief Investment Officer Mark Weiss discusses commercial real estate investment with Deirdre Bolton on Bloomberg Television's "Money Moves."
And Jeff Blau, chief executive officer of Related Cos., Chris Hentemann, managing partner at 400 Capital Management, William Rahm, senior managing director at Centerbridge Partners LP, and Christian Zugel, founder and chief investment officer at Zais Group LLC, participate in a panel discussion about investment opportunities in commercial and residential real estate. Bloomberg's Betty Liu moderates the panel at the Bloomberg Link Hedge Funds Summit in New York.