TORONTO - The Canada Pension Plan Investment Board has made another foray into alternatives, making its first investments in real estate, with plans to invest up to 5%, approximately C$8 billion (US$5.27 billion) of its total portfolio in real estate and infrastructure projects over the next 10 years.
After making about C$4.4 billion in commitments to private equity investments during the past two years, the equity investment unit of the Canada Pension Plan has committed C$200 million to Osmington Inc. to build a co-owned real estate portfolio with value-added growth potential over normal real estate cycles. The first joint investment was the C$300 million purchase of five shopping centers from Cadillac Fairview Corp., which is owned by the Ontario Teachers Pension Plan, also in Toronto.
The board's second commitment was up to C$100 million to the Canadian Income and Growth Fund, managed by LaSalle Investment Management (Canada) Inc., which will be invested over 30 months, primarily in Canadian office, industrial, retail and apartment properties.
"We're taking a very disciplined approach," said Mark Weisdorf, vice president, private market investments for the CPPIB, which now has about C$14 billion in assets under management and expects to have C$160 billion in assets by 2012. "We expect over the next 10- to 20-year period real estate should get a return somewhere between fixed-income (investments) and equity (investments),"' he added. "We don't expect it to outperform equity."
The current investments are "value-added strategies," said Mr. Weisdorf. "They have a shorter-term time horizon over the next three to five to seven years. Managers can buy assets and fix them up and sell them at a profit."
One Toronto-based consultant, who asked not to be identified, said the CPPIB might have "missed the boat" on real estate and won't find many good deals in which to participate.
"If we were trying to get into it over the next two to three years, we might well be late," Mr. Weisdorf acknowledged. "But we have an allocation of 5% (of the fund) over the next 10 years. If we don't find the right assets, we will invest in other asset classes."
Mr. Weisdorf noted that the weak economies now in North America and Europe have made the real estate market softer, with vacancies higher over the past year.
"If prices decline we can get to prices (for investments) from which we'll get a good return," he added. "We're not in a rush (to invest); we'll remain disciplined."
He said part of the CPPIB real estate strategy will be investing in large assets such as office towers and major shopping malls that it will hold for the long term and use as income-generating investments.
"It really depends on whether the right assets become available," said Mr. Weisdorf. "I expect over a 10-year period there will be some opportunities."
Toll roads, etc.
He also pointed out that part of the real estate strategy includes making infrastructure investments in projects such as toll roads, pipelines and energy assets.
"These are assets that should give us the same risk-adjusted rates of return as real estate," said Mr. Weisdorf.
The fund will focus first on investments in Canada and then go into the United States and Western Europe. Mr. Weisdorf thinks the long-term strategy of buying assets for their income-producing ability "will take more time."