Pension fund cuts real estate exposure amidst office slump
The Canada Pension Plan Investment Board (CPPIB) is rethinking its long-standing strategy of heavily investing in real estate after taking a hit from the weaker office market.
In its latest fiscal year through March, CPPIB recorded an 8% overall return and saw its total assets swell to CA$632 billion. However, that solid performance was dented by a 5% loss on its real estate holdings.
“Most of the losses were in the office sector, given the additional impact of changes in workplace trends,” CPPIB said in its annual report. It cited high interest rates and the pivot to remote work undermining demand for office space globally.
The remote revolution has emerged as a key challenge for major real estate investors like CPPIB, which had previously banked on premium office towers to drive long-term returns.
The pension fund manager, which has owned prime office towers for decades, has reduced its real estate exposure to about 8% of total assets, down from 9% a year earlier and 12% five years ago.
In recent months, CPPIB has sold off several office properties, including two Vancouver towers, a business park in Southern California, and a redevelopment project in Manhattan. The Manhattan project was sold for $1 just to relieve the fund of future obligations on the property.
Office properties now make up just 6% of CPPIB’s total real asset holdings, down from 9% the prior year. This is due to high interest rates and remote work, which have impacted office property values globally.
Despite these challenges, CPPIB’s total assets grew to $632 billion from $570 billion a year ago, thanks to strong performance in stocks, credit, and private equity.
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“The CPP Fund’s growth this year continued the trend of reaching heights several years ahead of initial actuarial projections,” said SPPIB chief executive John Graham. “Solid performance by all investment departments and key corporate functions helps demonstrate how our strategy is on track.”
CPPIB’s investments in public stocks and private equity rose by 13.8% and 10.4%, respectively, while its credit portfolio increased by 10.8%.
The pension fund has been actively involved in dealmaking, recently agreeing to buy utility owner Allete Inc. for $3.9 billion and participating in the IPO of cruise operator Viking Holdings. It also participated in the initial public offerings of Viking Holdings and health-care software company Waystar Holding Corp., according to Bloomberg.
However, the fund did take a hit in emerging market public equities, which CPPIB said was impacted by "losses in China diverging from other major markets due to challenges in the real estate sector" there.
While largely maintaining its China strategy, CPPIB has reportedly trimmed its workforce in Hong Kong, particularly in its Greater China public equities team. The pension plan has also reduced staff in real assets and private equity while expanding its credit investments team.
Despite these adjustments, CPPIB is expected to reach CA$1 trillion in assets by 2030. In the coming years, the fund will focus on expanding its private lending business.
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