British Columbia Investment Management Corp. is creating a real estate company with plans to increase exposure to the hot asset class.
The Vancouver-based pension fund heavyweight's new platform called QuadReal Property Group will develop and manage buildings in Canada, the U.S., Asia and Europe, starting with $18-billion in its own real estate assets. The pension plan, which oversees investments for B.C. public-sector pension plans as well as other government funds, said it will be able to improve returns and expand its global reach through this business.
Forming QuadReal will take more than two years as externally managed assets from Sun Life Financial Inc.'s North American real estate subsidiary Bentall Kennedy, GWL Realty Advisors Inc. and Realstar Properties Ltd. are folded into the company.
The domestic portfolio will begin to transfer in February of 2017, as assets from Bentall Kennedy will begin to move to QuadReal along with many of the staff who had been managing those properties. Over all, the transfer of 500 Canadian properties – office, industrial, retail and residential – worth $16-billion will take about two years. About $2-billion worth of properties outside of Canada have already been transferred to QuadReal.
The company will be co-led by Remco Daal and Jonathan Dubois-Phillips. Mr. Daal was formerly president of Bentall Kennedy's Canadian operations and will continue to oversee domestic assets. Mr. Dubois-Phillips, who was executive director of real estate strategy at BCIMC and has a background in real estate finance, will run QuadReal's international business.
Other large funds have had success operating their real estate funds as separate companies, and have steadily increased their exposure to these investments in recent years. The Caisse de dépôt et placement du Québec has owned Ivanhoé Cambridge since 1990 and it now has more than $55-billion in assets. The Ontario Teachers' Pension Plan bought long-time real estate partner Cadillac Fairview Corp. Ltd. in 1999 for $2.3-billion and now values it at more than $29-billion. Two years later, the Ontario Municipal Employees Retirement System (OMERS) bought Oxford Properties Group for $1.5-billion and has grown the business to $20-billion in assets under management.
Mr. Daal said the creation of QuadReal made economic sense and aligned with what other large pension fund peers have done. "There are very few opportunities to have done this in the last 50 years in Canada," Mr. Daal said, adding that the firm will be built with the agility to move quickly on real estate opportunities. "There's not many new name brands in the Canadian real estate landscape."
QuadReal's formation follows a steady rise in institutional investor demand for alternative assets such as real estate and infrastructure as both a way to hedge against public market volatility and to maximize returns in a low interest rate environment. BCIMC is among the organizations that wants to increase its exposure to these real assets. It has about 14 per cent of its total $123-billion investment portfolio in real estate now.
"The desire for more exposure to real assets exists in BCIMC so we're looking to get that 14 per cent closer to 18 per cent," Mr. Dubois-Phillips said. That would be the equivalent of adding $9-billion in properties in the next five years, ideally tilting toward international opportunities, if market conditions co-operate.
While real estate has generated solid returns for institutional investors in recent years, the Canada Pension Plan Investment Board recently warned that the party could be at its peak. In its recent annual report, CPPIB said that U.S. interest rate increases by the Federal Reserve would likely mark a shift in the real estate cycle characterized by somewhat lower returns. "We expect this challenging investment environment to continue to test our resolve as patient and disciplined investors," the report said.
Mr. Daal said he has seen real estate asset prices in Canada driven up by demand for hard assets as well as new foreign investors entering the market. The new company will be in "no rush to get money out the door," Mr. Dubois-Phillips said.
The name QuadReal comes not only from the four regions where the company will house investments, but also from the four real estate pillars it searches for: office, retail, residential and industrial properties. Or, as Mr. Daal puts it, "all the food groups."