Royal Bank of Canada has struck a joint venture with British Columbia Investment Management Corp. to launch a new fund catering to institutional clients with a growing appetite for investing in commercial real estate.
The partnership allows RBC Global Asset Management Inc. to tap into a portfolio of more than 40 of BCI’s Canadian real estate assets, collectively worth more than $7-billion and managed by QuadReal Property Group, a subsidiary that oversees BCI’s real estate program. The bank will create and manage the RBC Canadian Core Real Estate Fund, which will purchase half of the portfolio over three years. RBC expects to open the fund to small- and mid-sized institutional investors this fall.
Asset managers are attracted to commercial real estate investment as a niche business because it has proven relatively immune to the pressure on fees, is made up of assets that aren’t often targeted by index funds and attracts clients that tend to be loyal. As a result, competition in the sector has been heating up. Last July, Toronto-Dominion Bank announced a $792-million deal to buy Regina-based Greystone Managed Investments Inc., a firm that specializes in alternative investments such as real estate, mortgages and infrastructure, catering to pension funds, insurance providers and foundations.
RBC’s asset manager, which manages $425-billion in assets, began talks with BCI about six months ago. BCI is an investment and pension plan manager with $147-billion of managed assets globally and QuadReal oversees its $27.4-billion real estate portfolio.
RBC had set its sights on creating a real estate product that could match the scale sophistication of its existing offerings in equities and fixed income, and hired Michael Kitt, an executive with experience at Oxford Properties and Ontario Teachers’ Pension Plan Board, last August to build the bank’s real estate program.
“This is a story that’s been gaining momentum, the importance of real estate within institutional portfolios,” said Mr. Kitt, the head of real estate equity investment for RBC Global Asset Management. “So RBC GAM was very focused on building the business in the right way.”
By joining forces with RBC, BCI and QuadReal can keep a firm footing in Canada, while freeing up capital to reinvest in international markets. That fits with a larger trend of Canadian pension plans selling some of their domestic properties to go global, using proceeds from sales at home to shop outside the country.
“It provided us with the ability to continue to grow in Canada, while also reaping the benefits of having an internationally diversified portfolio,” said Dennis Lopez, QuadReal’s chief executive.
The real estate assets in the portfolio were chosen to “hit all the major food groups,” he said – office, retail, residential and industrial. “Overnight, investors that may have $50-million of capital or $100-million of capital basically are diversified on a national basis across the four major property types.”
Over time, RBC expects to become an equal owner of all properties in the portfolio, while BCI keeps a $3.5-billion stake. There will be four windows in which to invest – the first is this fall, and the last one will be in 2022. This staged approach is partly a way to manage the size of the investment, but it also seeks to alleviate investors’ concerns about buying in when real estate prices are high.
“If you’re concerned about the cycle, and you still want to have money working in the commercial real estate space, this is the perfect way to execute that plan,” Mr. Kitt said.
Eventually, RBC hopes to open the fund to a wider range of clients, such as individual accredited investors and advisers. And both Mr. Kitt and Mr. Lopez plan to explore further opportunities to jointly acquire assets.
“This isn’t the end of the story,” Mr. Kitt said. “Even though it’s a large start, it’s a start to a relationship that we intend to grow within Canada.”
With a report from David Milstead