Pension funds eye real estate bargains

TORONTO • Canadian pension funds are seeking to boost their real estate investments, betting the slumping property market will recover as the COVID-19 pandemic recedes and office workers and city dwellers return to downtown properties.

Canadian pension funds held US$278.7 billion in property assets in 2019, up four per cent from 2018, according to the Pension Investment Association of Canada, making them the country's largest real estate owners.

In a world of slower economic growth, very low interest rates, volatility in equity markets, real estate offers an attractive opportunity for pension funds, which take a long-term investment horizon, say market participants.

“We're looking for buying opportunities,” said Hilary Spann at CPP Investments, which manages US$456.7 billion. CPP's real estate portfolio generated a 5.1-percent return for the year ended March 2020.

CPP announced a U.S. joint venture with Greystar Real Estate Portfolio to build multiple separate housing units this month, a deal that was initiated pre-pandemic.

In November, it signed an agreement with Hudson Pacific Properties to acquire an office tower in Seattle. Spann said a lot of buyers that would have been competitive in the Seattle deal were temporarily on the sidelines. “So we were able to step in and pick up that asset at yields that we thought were quite attractive.”

As the pandemic forced many staff to work from home, office vacancy in Canada hit a 16-year high of 13.4 per cent in 2020, according to broker CBRE. Downtown offices were hit harder.

“I think pension funds are very well aware that ... there are times when values dip a bit and vacancies go up but overall real estate assets are a great part of any pension fund portfolio,” said Paul Morassutti, CBRE Canada vice chair.

CPP's Spann said while both rental markets and office may suffer in the shortterm, it was expected that both markets would return when the pandemic comes to an end.

“Office may fall in the short term but in the long term, as everybody does start coming back to the office, I think it's fair to say you may see a reversal,” she said, adding that the things that made places like New York and San Francisco vibrant will remain.

Kristopher Wojtecki at PSP Investments told Reuters the fund had been increasing exposure in select sectors including single family rental and production studio real estate during the pandemic.

However, Canada's second-largest pension fund, Caisse de dépôt et placement du Québec, is taking a contrarian approach. A spokeswoman for Ivanhoe Cambridge, its real estate arm, said the fund is cutting exposure in traditional asset classes and prioritizing growth sectors which include logistics and residential office buildings among others.