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The most current pension and investment information available in Canada, located in these easy to use directories. Click on any logo for information.
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©Copyright 2001 Rogers Media. The following article first appeared in the November 2001 edition of BENEFITS CANADA magazine.
Investment Strategies
Re-assessing real estate
There are both risks and opportunities in the real estate market.
Plan sponsors need to ask the right questions.
By Caroline Cakebread
The pile of twisted metal and dust that was once the landmark towers of the World Trade Center has now become a symbol of North America's vulnerability to attack. It has also created a deeply unsettling sense of insecurity.
To what extent has our concept of prime, downtown real estate been coloured by the events of Sept. 11? Although pictures of the devastated financial core of New York City are all around us, many believe that real estate is still a good investment for pension plan sponsors.
Stan Hamilton, senior associate dean at the University of British Columbia's faculty of commerce in Vancouver, firmly believes that real estate remains a sound investment in the long run. "We're still going to have buildings, we're still going to have investments [in them]," says Hamilton.
However, he does see a ripple effect from the events of Sept. 11. "A lot of the property managers are now looking at the fire and safety regulations on their buildings. I think security is going to become more of an issue. Buildings that attract a lot of attention are going to be scrutinized a lot more carefully by both investors and tenants."
POPULAR CHOICE
As both a hedge against inflation and a reasonably sound revenue base, real estate has long been a popular choice for plan sponsors looking to diversify their portfolios. Recently, Canada's largest pension funds have sought new investment opportunities by purchasing major property management companies such as Oxford Properties Group Inc., which was recently purchased by the Ontario Municipal Employees Retirement System.
These are the deals that make headlines. But managing an entire operating business takes deep pockets and a lot of time. Are there any opportunities for small- to mid-size plans to get involved in this asset class?
Hamilton points to more obvious opportunities such as real estate investment trusts. He adds that limited-term partnership ventures are another option. "They're typically pools of money that would be somewhere between $35 and $75 million. Six or eight pension investors would go into each of them, so you could end up being part owner in 10 or 15 properties--probably just enough to be diversified."
Fernand Perreault, president, real estate with CDP Capital Inc. in Montreal, believes that plan sponsors should be looking at real estate because it's a good complement to the bond and stock markets. He also sees global opportunities in this market, citing Asia and Japan. "Few investors are ready to go there now," says Perreault. "However, we believe that the upswing will be relatively interesting when the markets start to move up in the next few years."
NOTE OF CAUTION
Looking at international markets, Perreault points out the potential risks involved in creating a network of partners. "You need to be in a position to join with the best partners in every market and this takes size and critical mass." In the end, Hamilton cautions plan sponsors to make sure that they have the skill set necessary to seriously look at real estate. "We've seen examples of terrible investments made by well-meaning people who were just in over their heads."
Frequently, plan sponsors are treading on uncertain territory. "When pension trustees or pension managers sit down with somebody in stocks and bonds, they might not know everything about every company, but at least they know something about the process that's followed," says Hamilton. Real estate is a much different story, though.
"When you buy a piece of real estate, you're buying a little manufacturing plant," explains Hamilton. "You manufacture space and you rent that space. You've got to have an appreciation of the tenant mix and what that does to your risk. You get into a lot more detail. You don't have to do it all yourself, but you have to have the smarts to ask the right questions." BC
Caroline Cakebread is the editor of Canadian Investment Review, Benefits Canada's sister publication. ccakebread@rmpublishing.com.
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