Canadian pension funds are generating value by investing in green urban real estate using a two-pronged strategy, according to a paper on the Social Science Research Network.
“Through this model of impact investing, Canadian pension funds create the value from the ground up and drive the sustainable development of large cities,” wrote authors Sebastien Betermier, professor of finance at McGill University; Alexander Beath, Maaike Van Bragt and Quentin Spehner, analysts at CEM Benchmarking Inc.; and Yuedan Liu, an advisor at the Public Sector Pension Investment Board.
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In researching the paper, which was last updated in December 2021 and is currently undergoing the peer review process, the authors found that seven large Canadian pension funds were responsible for 60 per cent of the total value of direct real estate deals involving pension funds — despite controlling just six per cent of the assets of all pensions analyzed.
The authors went on to identify a shared approach being used by these Canadian pension investors to secure market-beating returns from these investments. By combining global asset diversification with local impact strategies that consist of internally developing and greening urban properties, these Canadian pension funds have achieved high returns while driving the development of major city centres.
“It seems to be that the strategy employed by the large Canadian direct investors is very focused,” says Beath. “They are buying up properties in downtown cores of major urban centres, retrofitting the building and either keeping or selling them. It’s a basic rinse, wash and repeat [approach]. The fact that they are securing good returns by this strategy is pretty clear — it’s why it is repeated.”
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Beath believes the research should put an end to speculation about whether environmental, social and governance investing strategies bring real value to real estate investments. “In real estate, the evidence is clear. You can pursue a green urban development strategy and get a better return on your investment.”
When it comes to alternative investments in general, Canada’s large pension plans have been successful at securing market-beating returns by relying on in-house expertise, according to the paper. While it may be difficult for smaller plans to emulate the approach taken by the largest ones in terms of infrastructure and private equity investments, Beath notes that emulating the strategy in real estate can be done by anyone able to buy a single building.
“The fact of the matter is that smaller plans pick and choose characteristics of the [largest Canadian pension plans] that are accessible to them. . . . It’s not that they can’t invest in infrastructure and private equity — it’s that they can’t do it directly.”