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Wednesday , 23 April 2014
Pension funds performing well, real estate a big factor

Pension funds performing well, real estate a big factor

“Should Canadians be concerned about their CPP pensions?” This is the first of the FAQs on the Canada Pension Plan Investment Board (CPPIB) website, and no doubt reflects a widespread belief that was circulating a few years ago. That scary rumour held that the CPP would run out of money in about a decade, thanks to baby boomers sucking it dry, and there’d be nothing left for the next generation of pensioners.

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Four of Canada’s biggest pension funds are among the world’s biggest investors in commercial real estate. Source: CNW The Top Ten

But the answer to the question is a definite “NO,” and we can illustrate quite convincingly why. At the end of 2012, the CPP fund, which is not even used to pay out pensions at this time, stood at $172.6 billion. As of the end of March, 2013, it had reached $183.3 billion, an increase of $10.7 billion in just three months. The fund is sustainable at present rates of contributions from Canadians (9.9 per cent) for the next 75 years, according to the chief actuary’s report.

The CPPIB  is one of the largest public pension funds in the world, and is one of the so-called Top Ten of Canada. The list includes well-known funds such as the Ontario Municipal Employees Retirement System, or OMERS; the Ontario Teachers’ Pension Plan, and the Public Sector Pension Investment Board, or PSP. Together, the Top Ten held $714 billion in assets under management in 2011, constituting 35 per cent of all Canadian retirement assets.

A report commissioned by members of the Top Ten and conducted by The Boston Consulting Group looked at the economic impact of the organizations and the reasons for their success. One of the findings was that the combined assets of the ten have grown by 100 per cent in the past decade, a time that included the worst economic crisis since the Great Depression.

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A study of Canada’s biggest pension funds reports that they are a “major cornerstone” of the Canadian economy and financial system. Real estate is increasingly important for many of the so-called Top Ten. Source: CNW The Top Ten

During a highly volatile period of time that encompassed the worst financial downturn since the Great Depression, the Top Ten have managed to more than double their pension assets, driven primarily through their investment activities. This strong performance underscores the Top Ten’s role as a cornerstone of Canada’s well-regarded retirement income system.

Michael Block, BCG

How did they do it?

One part of the answer is real estate. The ten pension funds have invested more than $100 billion in real estate, much of it in Canada. In fact, four of the top twenty global commercial real estate investors are members of Canada’s Top Ten.

The CPPIB is by far the largest of the group and has one of the largest portfolios of real estate by value. According to a Globe and Mail report, the CPPIB spent $860 million on shopping malls just in the past nine months. Real estate makes up 10.8 per cent of the fund’s total investments.

OMERS takes real estate so seriously that it has its own real estate investment company, Oxford Properties, which manages more than $20 billion in real estate assets on its behalf. That is approximately one-third of OMERS’ total assets. These include some of the most visible properties in Toronto and elsewhere, properties such as the TD Canada Trust Tower, the Richmond-Adelaide Complex and the Royal Bank Plaza in Toronto’s financial district; Yorkdale Shopping Centre, Square One Shopping Centre, Scarborough Town Centre and Hillcrest Mall in the retail sector; and hotels and residential buildings across Canada. In 2011 Oxford Properties acquired the Metro Toronto Convention Centre. The name Oxford Properties is in the news almost daily in Toronto, and it’s not because it’s losing money.

Better than average returns

Owning all of this real estate is one thing, but does it pay? Oxford Properties Group reported a 16.91 per cent rate of return on its real estate holdings in 2012. This compares with 19.17 per cent reported by OMERS in its private equity portfolio.

PSP, another of the Top Ten funds, reported that it reduced its exposure to public equities and increased its investment in “real return asset classes” including real estate in 2012. The fund’s real estate investment team invested in properties in Brazil, Colombia, New York, and Canada. Real estate now accounts for 13 per cent of PSP’s investments. The fund reports that its annualized rate of return on all investments for the three years since the financial “meltdown” of 2008-2009 was 12.7 per cent. Returns on the real estate portfolio were a little better, at 13.4 per cent.

The investment mix varies from fund to fund: OMERS, through Oxford Properties is more heavily invested in office and retail, with 46 per cent and 26 per cent respectively, while PSP has a relatively modest investment of 7.6 per cent in retail and much higher exposure to the residential real estate market, at 31.4 per cent.

Asked what makes retail real estate particularly attractive to a pension plan investor like CPPIB, the head of the fund’s real estate division, Graeme Eadie, told the Globe that it is a matter of stable income. Shopping malls tend to have long-term tenants and therefore low vacancy rates. This provides a stable income return. Office buildings, on the other hand, tend to have a few large tenants, and when one leaves, the vacancy can be a problem. CPPIB as of March 31, 2013 had $8.2 billion invested in shopping malls around the world.

About Nicole Ryan Editor

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I am Nicole Ryan, a contributing editor at Condo.ca—Canada's Condominium Magazine.

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