The Canada Pension Plan Investment Board is investing $1.04-billion in two office towers in Australia, the largest investment it's ever made in a single real estate project.
The deal is part of a series of bets that Canadian institutional investors are placing on office towers amid the global financial crisis. Their aim is to secure towers in major cities, such as London, Toronto and Sydney, at a time when sluggish economic growth has taken a toll on the market.
It is also part of a wave of Canadian institutional money flowing into Australia, a market that appeals to investors here because of its links to Asia, its natural resources, and its large infrastructure requirements.
This investment was more than three years in the making. Initial talks were hampered by the aftermath of the financial crisis, and gained momentum again about a year ago.
The relative health of Australia's economy was part of the appeal for CPPIB. "Australia is an economy that, like Canada, has been reasonably resilient during the economic crisis," said CPPIB chief executive officer Mark Wiseman.
And, much like Toronto, Sydney has not seen much new office space come up lately, leading CPPIB to conclude that there will be a lag of supply in the Australian city for the next few years.
The development in which the Canadian pension plan is investing is one a handful of new office projects that have approval to go ahead there.
CPPIB announced late last year that it was teaming up with the real estate arm of the Ontario Municipal Employees Retirement System to build a 30-storey office tower downtown Toronto that will become the new national headquarters of the Royal Bank of Canada. In May, Toronto's Dundee Real Estate Investment Trust partnered with Calgary's H&R Real Estate Investment Trust to buy the 68-storey Scotia Plaza tower in Toronto's financial core, paying $1.27-billion, the highest amount ever for a Canadian office building. And last month Brookfield Office Properties Inc. said that it will begin construction on a second office tower in Toronto's Bay Adelaide Centre.
Brookfield also struck a deal last month that will see it spend $829-million (U.S.) to buy a portfolio of office towers in London's financial district.
The Australian development in which CPPIB is investing was conceived some time ago by its partner, Lend Lease Corp., and is part of an ambitious vision to turn what is now essentially a massive abandoned warehouse space on Sydney's harbour, near its main business district, into a hub of activity. CPPIB has formed a joint venture with Lend Lease and the Australian Prime Property Fund Commercial that has committed a total of $2.08-billion to the development of two waterfront towers at the Barangaroo South Project. The towers, one 41 floors high and the other 38, will total 165,773 square metres and include a retail component. They are expected to be completed in 2015, and the joint venture is considering building a third tower down the line.
This marks CPPIB's first direct office investment in Australia.
Lend Lease announced last month that Westpac Banking Corp. had signed a lease for about 70 per cent of the commercial space in the first tower, and KPMG had signed a lease for much of the second tower. Lend Lease also plans to move its offices into the second tower.
"In this case, we will get the uplift from additional returns associated with a new development project, while at the same time benefiting from a structure where construction risk is mitigated and first-class tenants are already secured on a long-term basis," Mr. Wiseman said.
Canadian institutional investors have been plowing so much money into Australia of late that CPPIB's announcement this weekend prompted The Australian Financial Review to declare that "the Mounties are back."
More specifically, Canada's pension plans have gained a reputation within Australia for their investments in infrastructure and real estate. Recent examples include CPPIB's $3.4-billion purchase of toll road firm Intoll Group; CPPIB spending $473-million for a 50-per-cent stake in Melbourne's Northland Shopping Centre; Alberta Investment Management Corp. (AIMCo)'s multi-million dollar deal for 2,680 square kilometres of forest land; and the Caisse de depot et placement du Quebec's current $1-billion-plus bid, as part of a consortium, for an Australian gas pipeline owner.