Two of Canada's largest pension funds are building out their commercial real estate partnership across Canada with a deal to co-own several large office buildings in Toronto and Calgary.
The Canada Pension Plan Investment Board said it would buy half of a bundle of seven office properties from the real estate arm of the Ontario Municipal Employees Retirement System for nearly $1.2-billion. As a result of Thursday's deal, the two pension funds now co-own 12 million square feet of office space across Canada. That is roughly equivalent to four times the size of First Canadian Place in Toronto, where Bank of Montreal has its headquarters.
This is the largest deal the partners have struck and one of the largest in Canada, since the properties have a total valuation of $2.35-billion. OMERS' Oxford Properties Group and the CPPIB have been splitting investments in commercial real estate since 2005 when they agreed to share a portfolio of 10 Canadian office properties. The CPPIB has since become Oxford's largest partner, and represents roughly 40 per cent of the $10-billion managed for investors outside OMERS.
The transaction is just one example of the way Canadian pension funds are building stronger relationships between each other as they look to invest in alternative assets around the world. The low-interest-rate environment has pushed major institutional investors toward less liquid asset classes such as real estate, private equity and infrastructure as both a way to hedge against public market volatility and to eke out larger returns on their investments. In many cases, pension funds look to partner with other investors on these deals.
"We have a lot of capital, which allows us to get into multiple markets and multiple sectors, and so our strategy is always to find the best partner in each of those markets and sectors," said Peter Ballon, head of real estate investments at the CPPIB. "When we find a partner like Oxford, we seek opportunities to grow with them."
The buildings involved in Thursday's deal are located in desirable hubs of their respective cities. In Toronto, that includes a city block that's home to the Richmond-Adelaide Centre. In Calgary, Centennial Place is located near the Eau Claire market and the Bow River. Together, the properties span 4.2 million square feet of space and will continue to be managed by Oxford.
The CPPIB's interest in Centennial Place in Calgary surfaced back in 2010 when the building first opened, said Blake Hutcheson, chief executive officer of Oxford. In the years since, the oil downturn has put pressure on the commercial real estate market, limiting the demand for space but creating new opportunities for perspective investors.
"We recognize that it's a cyclical market, and we recognize that now is probably a better time in the cycle to be acquiring real estate than when oil is much more expensive. But I should note we're not making a call on oil prices ... we think this is very high-quality real estate," Mr. Ballon said. He added that the nearly 10-year average lease terms of the tenants made the investment opportunity more attractive.
More recently, Oxford and the CPPIB's conversations turned to Toronto. "I think, for both sides, having some Toronto and some Alberta made a portfolio option better than a single option here or there," Mr. Hutcheson said of the properties being sold.
Many large pension funds and other institutional investors around the world are expected to invest more in real estate directly or acquire operating platforms in the coming years, according to recent research from McKinsey & Co.
That demand has been demonstrated in Canada. In June, British Columbia Investment Management Corp. moved to create its own real estate business called QuadReal Property Group to develop and manage buildings in Canada and abroad. It started with $18-billion in its own real estate assets.
The CPPIB's partnerships alongside Oxford and other international players reflects the fund's global investment strategy. The CPPIB reported $36-billion in real estate investment assets as of June 30. "We're always trying to think of real estate beyond just the individual returns of an asset," Mr. Ballon said. "We look at portfolio construction and we try to find buildings that complement our existing portfolio."
As more institutional investors buy and own commercial real estate in Canada, Mr. Ballon and Mr. Hutcheson both said they've seen the Canadian commercial real estate market become more stable, with investors better able to weather distressed environments.
Oxford plans to use the capital from the sale to invest in new real estate opportunities. Along with buying Canadian properties, about 40 per cent of Oxford's portfolio is now based outside the country. Oxford has an interest in taking on new investments in London, Paris and some major U.S. cities.
Mr. Hutcheson said Oxford and the CPPIB have jointly approached international commercial real estate deals in recent months, but the right investment has yet to materialize.