Quebec pension hit with real estate loss as ‘hostile’ market persists

QUEBEC’S public pension manager reported a 7.2% return for 2023, as losses in real estate detracted from big gains in its credit and stock portfolios.

Caisse de Depot et Placement du Quebec (CDPQ) has restructured its real estate business, shifting capital to apartments and industrial properties, but it wasn’t enough to offset problems in the office sector.

The fund manager posted a 6.2% loss on its C$46bil property portfolio – the only asset class for which it had a negative return last year.

Nathalie Palladitcheff, the head of Ivanhoe Cambridge, CDPQ’S real estate arm, described last year’s environment as “hostile” in a press conference.

High interest rates and low occupancy have created a difficult outlook for office owners and their lenders, with more than us$1 trillion in commercial real estate loans set to mature by the end of next year.

“The increase in rates impacts both the valuation and the cost of debt, and this resulted in a very significant drop in transactional volumes on a global scale,” Palladitcheff said, referring to the broader real estate market.

“They have been halved in Europe, halved in the united States, even an 80% drop in transactions in Germany, for example.”

Major German real estate companies are facing a dramatic slowdown in deals and pressure on valuations that were brought about by rising interest rates.

While many are resorting to asset sales for a liquidity boost, a weaker market with a steady supply of properties means securing high enough prices to pay down debt can be difficult.

Meanwhile, in the united States there were 635 commercial real estate foreclosures in January, up 17% from the previous month and roughly twice as many as in January 2023, according to a report from property data provider Attom.

Those figures are based on the number of commercial properties with at least one foreclosure filing entered into Attom’s data warehouse in a given month.

Still, the fund’s top executive said Ivanhoe is more resilient than other real estate companies because of the quality of its buildings.

“If you take the united States, which is 50% of the total portfolio, our assets have sold at around minus 3%, while the market is at minus 20%,” chief executive officer Charles Emond said.

To reduce costs, Ivanhoe and another real estate division, Otera Capital, are being integrated under CDPQ, which expects to eventually save about C$100mil a year.

In equity markets, Canada’s second-largest pension fund benefited from its high exposure to the technology sector with a 17.7% gain.

But CDPQ’S private-equity portfolio recorded just a 1% increase, as rising financing costs impacted private companies.

“You look at the past five years, private equity is the biggest driver,” Emond said. A smaller gain last year is “something that is not completely unexpected after a 70% return over three years”.

CDPQ’S fixed-income portfolio gained 8.1%, led by credit with an 8.7% return.

The fund’s net assets grew by C$32bil to end last year at C$434bil. It’s a shift from 2022’s results, when the firm posted its worst annual return since the global financial crisis.

CDPQ’S assets under management have grown by almost C$100bil since the beginning of 2020.

“We may reach a crossroads in the year ahead, with many central banks likely to pivot, but the scope and sequence remain unknown,” Emond said in a statement.

“With a backdrop of downward but persistent inflationary pressure combined with lingering volatility, our portfolio remains well-positioned to keep delivering the long-term returns our depositors need.”

“You look at the past five years, private equity is the biggest driver. A smaller gain last year is “something that is not completely unexpected after a 70% return over three years.” Charles Emond