Canadian pension funds embracing co-investments in real estate

With many funds considering co-investments for real estate deals, Canadian pension plans have been particularly eager to embrace the option.

Globally, 19 per cent of public pension funds and 15 per cent of private plans make co-investments, according to a report published last year by London, England-based data and intelligence company Preqin Ltd. Those numbers rise to 44 per cent and 31 per cent, respectively, for Canadian funds.

“Canadian pension funds will be more likely to do it because they tend to be active and tend to have large teams,” says Andrew Moylan, head of real estate products at Preqin.

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Those types of joint ventures are the Canada Pension Plan Investment Board’s preferred structure for real estate transactions, according to Peter Ballon, a managing director and head of real estate investment at the pension fund. “Our principal strategy is to work with strong operating partners and management teams who have deep, local expertise to effectively operate and manage our investments,” he said.

The CPPIB’s Canadian partners include Oxford Properties Group Inc., RioCan Management Inc., First Capital Realty Inc. and Ivanhoé Cambridge, while some of its global joint-venture partners are Westfield Corp. and Goodman Group. In December 2016, it partnered with another large Canadian pension fund, the Public Sector Pension Investment Board, to acquire a 50 per cent interest in a portfolio of commercial properties in New Zealand.

Read: Two big pension funds team up in New Zealand real estate deal

The challenges

The trend towards co-investing will likely continue as pension plans increasingly look to real estate as an asset class for their funds, says Marc Weidner, a managing director and head of investments at Franklin Real Asset Advisors. “And we see this as a long-term trend, not a cyclical trend, because we believe real estate is local and inefficient. These local inefficiencies are creating returns that are diversified, which is the holy grail for portfolio managers and institutional investors.”

But there are challenges, including the level of due diligence required and speed of execution, according to Moylan. “Investors might be able to carry out due diligence on a particular manager and commit capital to the fund, but going the extra level and co-investing in the transaction requires that additional level of staff resource, knowledge and experience to carry out the necessary due diligence,” he says.

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Weidner agrees an investor’s size and resources are important, especially if it intends to focus globally. “If you don’t have the resources to deploy around the world, to build a real estate investment team, it’s going to be very difficult to build a diversified real estate portfolio that is global,” he says.

The attractions

On the other hand, part of the attraction of co-investing in real estate is the use of a third-party manager, including its team, asset management capability and access to deal flow, while still maintaining a level of control and governance, says Moylan.

Timing, of course, can be everything when it comes to co-investing in real estate, according to Weidner. “If you have a time-sensitive transaction, you can sometimes transform that and create a price advantage because you’re dealing with a motivated seller, including the local partners,” he says.

“Again, back to resources, you need to have the luxury of a team that is available at the time that is determined by the transaction, not by the seasonality of the business.”

Read: What should institutional investors expect from the real estate market in 2017?

Jennifer Paterson is the managing editor of Benefits Canada.

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