The Canada Pension Plan Investment Board's decision to spend £173.9-million ($281.8-million Cdn) on a half-stake in a portfolio of eight London office buildings is part of a shift the pension fund is making away from London's financial core toward the West End.
The move enables CPPIB to invest in smaller buildings than it normally would.
CPPIB is forming a joint venture with Hermes Real Estate Investment Management Ltd., which is part of the BT Pension Scheme, one of the U.K.'s largest private pension funds. The deal will see Hermes sell CPPIB half of a 550,000-square-foot office portfolio that it has built up over the past few years, mostly in London's West End. The partners jointly intend to double the size of the portfolio in the future.
Wenzel Hoberg, the CPPIB's head of real estate investments for Europe, said the move is part of a strategic decision the Canadian pension plan has made to reduce its exposure to London's financial district, known as The City, and increase its exposure to the West End, where Mr. Hoberg feels that supply is more constrained.
When the pension fund began buying London office properties around 2006 and 2007 it focused on The City, but Mr. Hoberg now thinks that the West End offers more long-term value, and so it has been selling some of its earlier investments.
CPPIB announced last year that it was forming a joint venture with Land Securities Group PLC, the U.K.'s biggest commercial property firm, to develop a project that includes five new buildings (a mix of residential, office, retail and public amenities) opposite Victoria Station in the West End.
Mr. Hoberg said the portfolio of eight buildings that CPPIB is now investing in presents opportunities for refurbishment or even redevelopment – potentially changing the use of some of the space from office to residential or retail. And this deal allowed CPPIB to invest in smaller offices than it otherwise would consider, because Hermes had already spent time evaluating and assembling them.
"Normally we access larger product, because of our size and scale and our processes," he said. "This way we can benefit from the work our partner has been doing the last two or three years."