Caisse real estate unit rebounds in first half after two-year downturn

After two difficult years in real estate, Caisse de dépôt et placement du Québec is showing signs of turning around its troubled portfolio.

The pension fund giant said Wednesday its Ivanhoé Cambridge property unit reported a 4.1 per cent return in the first six months of 2021, compared with a benchmark portfolio that lost 0.9 per cent over the same period.

The Caisse’s results have been dragged down since 2019 because of an overreliance on retail real estate, a problem that accelerated during the shutdowns related to COVID-19. The Caisse reported a 2.7 per cent loss in real estate in 2019 – prior to the pandemic – followed by a 15.6 per cent loss in 2020. Those results caused the pension fund to lag behind its benchmark in both years.

Since early 2020, when the Caisse pledged to sell off a chunk of its shopping-mall portfolio, the pension manager has plowed money into logistics and warehousing, life-sciences-related real estate and select residential projects. Industrial properties such as warehouses and distribution centres have become a magnet for money since the beginning of the pandemic, as consumers turned to e-commerce when stores closed because of government restrictions.

One Canadian pension fund that has been in on the trend is the Healthcare of Ontario Pension Plan. CEO Jeff Wendling told The Globe and Mail in March that a well-diversified real estate portfolio that overweighted logistics and warehousing properties coming into 2020 had “a big advantage.”

The Caisse said it has engaged in 40 transactions so far in 2021, totalling $5.1-billion, with $2.4-billion in sales and $2.7-billion in new investments. The pension fund sold shopping malls in British Columbia and Nova Scotia, as well as a 51-storey skyscraper in downtown Montreal known as 1000 de la Gauchetière.

Buyers remain interested in real estate classes such as office buildings despite the work-from-home trend, said Ivanhoé chief executive officer, Nathalie Palladitcheff. She said Ivanhoé has not had to resort to accepting fire-sale prices for buildings it has divested.

“We had a plan, but we were not in a rush, so we did not do stupid things,” Ms. Palladitcheff said at a news conference. “It’s a question of responsibility, to make the right disposals at the right time, and if we cannot, we must be patient.”

She said Ivanhoé is about two-thirds of the way through its plan to retool its portfolio. “There are still some disposals to achieve,” she said. ”Next year will probably be the last touch.”

Martin Boyer, a professor of finance at Montreal’s HEC business school and member of its Retirement and Savings Institute, said in an interview Wednesday “It looks like the steps they’ve taken to restructure [real estate] are bearing fruit. Ivanhoé Cambridge and the entire infrastructure portfolio appears to be doing better.”

While the midyear numbers represent just six short months in the life of a long-term investor, they also show the power of real estate in the Caisse’s overall performance. The fund said its overall return through June 30 was 5.6 per cent, beating its benchmark of 4.4 per cent. Assets reached $390-billion.

Few of the Caisse’s peers release half-year results for comparison. The Ontario Municipal Employees Retirement System (OMERS) released midyear results for the first time in its history last week, reporting it posted an 8.8 per cent return in the first six months of 2021.

Ontario Teachers’ Pension Plan is set to release midyear results soon.

The Caisse said Wednesday its equities asset class – which is about half its portfolio – recorded a 12.1 per cent return versus a benchmark of 12.0 per cent.

Its equity markets portfolio – stocks that trade on public exchanges – gained 11.4 per cent, compared to 9.3 per cent for its benchmark index. The Caisse credited the outperformance of Canadian stocks for part of its gain.

The Caisse’s private equity portfolio posted a 13.5 per cent return, which trailed a 16.8 per cent return for its benchmark. The Caisse said its portfolio was underweight in traditional energy and financial institutions.

Fixed income, about one-third of the Caisse’s total investments, posted a six-month return of minus 1.8 per cent compared with negative 2 per cent for its benchmark. Sharply rising interest rates have depressed bond prices, the Caisse noted.

Its real assets portfolio, which includes real estate and infrastructure, and is roughly 20 per cent of the Caisse’s total portfolio, posted a six-month return of 4.1 per cent, compared with 0.4 per cent for the benchmark index.

The infrastructure portion of real assets reported a 3.9 per cent return for the period, compared to 1.9 per cent for its benchmark index. The Caisse credited the performance of assets in the wind and solar energy sectors.

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