Funds hit by market slump and high rates are restructuring operations to adapt
Canadian pension funds, once envied for their massive real estate holdings, are reeling from a $1.24 trillion loss in their property portfolios, according to a Bloomberg report.
The Canada Pension Plan Investment Board, the largest fund, reported a 5% loss on its property portfolio in the last fiscal year. The Public Sector Pension Investment Board faced an even steeper decline, with a 16% loss on real estate investments – its worst performance since the global financial crisis.
"What's worked famously well for the last 35 years may not work so well for the next five to 10," Jo Taylor, CEO of the Ontario Teachers' Pension Plan (OTPP), which manages $248 billion, told Bloomberg.
The fund is dealing with its worst four-year run in real estate since acquiring Cadillac Fairview in 2000.
In response to the downturn, Taylor has shifted Ontario Teachers' for most of the fund’s future real estate investments away from Cadillac Fairview and integrated them into the broader operations of OTPP, aligning them with other asset classes.
The Caisse de Depot et Placement du Quebec, Canada's second-largest pension plan, lost 6.2% on real estate investments in fiscal 2023. To counteract these losses, it's merging its real estate business with its property lending arm, aiming to save $100 million annually.
These losses and restructurings mark a significant shift for Canadian pension funds, which have been major players in global real estate.
Despite managing only 6% of global pension assets, Canadian pension funds account for 60% of the total value of private real estate deals directly involving pensions.
“The real estate sector is changing dramatically,” York University professor Jim Clayton said. “At the same time, we now have this structural shift in the way we work and live, which has sped up post-Covid. So I think you have people really rethinking what real estate is.”
Read next: Why Canada's biggest pension board is pulling back from real estate market
Some funds are adjusting their strategies. The CDPQ is looking to increase co-investments and third-party management. CPPIB has reduced its office exposure from 9% to 6% of real assets over the past year, even selling a Manhattan property for just $1.
Not all funds are changing course. The Ontario Municipal Employees Retirement System (Omers) plans to hold onto its office properties despite a 7.2% slump in its overall real estate portfolio last year.
Blake Hutcheson, Omers' CEO, explained that while appraisers have marked down property values, the buildings continue to generate good income.
“We don’t give them money and say, ‘Go spend it.’ They go through the exact same process as our private equity business and the like,” Hutcheson said. “So the synergies that the others hope to achieve, we’ve been achieving for decades.”
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