Real es­tate tak­ing up more room in Cana­dian pen­sion funds

Northern News (Kirkland Lake) - - BUSINESS - GARRY MARR

TORONTO — A new re­port from RBC Cap­i­tal Mar­kets high­lights the in­creas­ing dom­i­nance of Cana­dian pen­sion funds in the real es­tate sec­tor glob­ally.

The po­si­tion of pen­sion funds, which own such Cana­dian real es­tate land­marks as the York­dale Shop­ping Cen­tre and the TD Cen­tre in Toronto, con­tin­ues to grow and the top 24 Cana­dian pen­sion funds now own $188 bil­lion of real es­tate, ac­cord­ing to RBC an­a­lysts Neil Downey and Michael Smith.

Al­lo­ca­tion of real es­tate now amounts to 13 per cent of the to­tal in­vest­ments of $1.5 tril­lion at those funds.

“Real es­tate al­lo­ca­tion tar­gets have con­tin­ued to creep higher, and we be­lieve they may reach 14 per cent to 16 per cent over the next five years,” the pair write in a re­port to clients. “Cana­dian pen­sion plans are a ma­jor force in the do­mes­tic in­vest­ment prop­erty mar­ket. Over the past two decades, the big­gest plans have had a grow­ing in­flu­ence on direct prop­erty in­vest­ment around the globe.”

Downey and Smith say the pen­sion fund li­a­bil­i­ties have been dra­mat­i­cally af­fected over time by his­tor­i­cally low real in­ter­est rates, chang­ing de­mo­graph­ics, higher life ex­pectancy and longer re­tire­ments and the fact that some plans are ma­tur­ing to the point whereby their tol­er­ance for volatil­ity or risk is likely di­min­ish­ing.

“(Pen­sion funds have) some gen­uine com­pet­i­tive ad­van­tages, in­clud­ing a typ­i­cally con­stant and pre­dictable stream of con­tri­bu­tion in­flows for many years to come, and the abil­ity to in­vest for the long term,” they write.

Those plans are ag­gres­sively turn­ing to real es­tate. Be­tween 2004 and 2016, to­tal plan net as­sets grew to $1.5 tril­lion from $485 bil­lion, a long-term com­pound an­nual growth rate of just un­der 10 per cent. Dur­ing the same pe­riod prop­erty in­vest­ments jumped to $188 bil­lion in 2016 from $32 bil­lion in 2004, a com­pound an­nual growth rate of about 16 per cent.

“With the growth rate of real prop­erty in­vest­ments dra­mat­i­cally out­pac­ing growth in to­tal plan as­sets, the re­sults has been a longterm trend to­wards higher real prop­erty al­lo­ca­tions. More specif­i­cally, the col­lec­tive al­lo­ca­tion to real prop­erty for the 24 funds has in­creased from 6.6 per cent in 2004 to 12.9 per cent in 2016,” Downey and Smith write.

The ag­gre­gate tar­get al­lo­ca­tion of those 24 plans was ac­tu­ally 13.3 per cent, so they are still about $5 bil­lion un­der-al­lo­cated to real prop­erty.

The re­port notes that over time pen­sion funds are in­creas­ing al­lo­ca­tion to real es­tate – it jumped 365 ba­sis points in the last 10 years, or from 9.7 per cent to the cur­rent 13.3 per cent.

“Even in the past three years this tar­get in­vest­ment al­lo­ca­tion has con­tin­ued to ‘creep’ higher by ap­prox­i­mately 100 ba­sis points,” they say. “We ex­pect the up­ward trend in tar­get al­lo­ca­tions will con­tinue, al­beit at a slow pace, to some­where in the 14 per cent to 16 per cent range over the next five years.”

The gains in real es­tate al­lo­ca­tion com­pares with a de­cline in pen­sion fund ex­po­sure to listed equities. In­vest­ments in listed equities have in­creased from $297 bil­lion in 2006 to $551 bil­lion in 2016 but their al­lo­ca­tion has de­clined by about 740 ba­sis points, from 45.2 per cent in 2006 to 37.8 per cent in 2016.

“Much of the growth in real es­tate and in­fras­truc­ture in­vest­ments has come at the ex­pense of growth in listed equities,” says the re­port.

Cana­dian pen­sion plans are a ma­jor force in the do­mes­tic in­vest­ment prop­erty mar­ket.” RBC Cap­i­tal Mar­kets re­port

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