When LaSalle Investment Management launched its Canadian property fund, the global real estate investor had to persuade foreign investment firms that Canada’s commercial real estate market was not overpriced and tightly controlled by the country’s biggest pension funds.
“Some groups had initial misconceptions of Canada,” John McKinlay, chief executive of LaSalle Canada, said in an interview this week. “They had an antiquated view that the markets were more closed and pension funds traded between themselves.”
He added that the value of the LaSalle Canada Property Fund has now reached more than $1-billion, including debt.
The Chicago-based real estate investor has US$60-billion in assets under management. It launched the Canadian fund in December.
Mr. McKinlay said the source of the misconceptions was not just the dominance of the pension funds, which own many of the country’s most profitable shopping malls and office towers. He said the foreign investors LaSalle Canada approached were worried about the high price of real estate, and believed the Canadian economy was based mainly on natural resources.
But the LaSalle CEO said that after he explained Canada is one the world’s most stable property markets with robust investment gains, three investment firms agreed to contribute capital to the fund.
“The higher returns, low volatility really resonated,” Mr. McKinlay said. The property fund is now LaSalle’s fastest growing “open-ended fund,” a type of fund that continues to raise capital and acquire assets. Two of the investors are based in the United States and one is in Europe. LaSalle would not provide their names.
Canada’s commercial real estate market had an average annual return of 10.3 per cent over the past 15 years, according to LaSalle research. In comparison, performance in the United States was 9 per cent and in Britain was 7.7 per cent. Australia’s market had a slightly higher return, but was more volatile than Canada’s.
As for other concerns, Mr. McKinlay said he told the potential investors the big pension funds have collectively divested at least $25-billion in Canadian commercial real estate over the past five years and that natural resources made up a small part of economic output in Canada’s largest property markets.
“It wasn’t hard to put forth the view that, particularly in our major markets, that Canada is very much a modern, technology-driven, office-using service economy,” Mr. McKinlay said. “That’s obviously what core investors covet.”
LaSalle’s new Canadian investment vehicle is not playing in the same space as the big Canadian pension funds, which own and operate some of the country’s most-prized assets. For example, Alberta Investment Management Corp. and a company that belongs to Ontario Municipal Employees Retirement System jointly own Canada’s most lucrative shopping centre, Toronto’s Yorkdale mall. Canada Pension Plan Investment Board owns stakes in prime Toronto office towers such as Royal Bank Plaza and First Canadian Place.
Although the LaSalle Canada Property Fund has a stake in a high-profile office complex in Ottawa, most of the 11 properties in the fund have a lower profile. The portfolio includes office buildings in Vancouver and Toronto and three apartment buildings in Edmonton.
LaSalle’s new fund was established as foreign investment in Canadian commercial real estate was shrinking. Foreign investment was $3.4-billion last year compared with $5.6-billion in the previous year, according to commercial realtor CBRE.
For the next round of equity raising for the fund, Mr. McKinlay said he will seek domestic investors.