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CPPIB buys into Indian logistics amid rising investor interest

CPPIB CEO Mark Machin walks through the pension fund’s Toronto offices in this file photo.

Mark Blinch/The Globe and Mail

Canada Pension Plan Investment Board is forging ahead with its plans to make significant new investments in India, taking a large stake in an industrial real estate partnership.

The country's largest pension fund said Monday that it would spend $500-million (U.S.) to buy and develop modern logistics real estate, such as warehouses and industrial parks, through a joint venture with a local partner called IndoSpace.

The first 13 industrial and logistics parks will be acquired over the next two years, which will give the pension fund a foothold of 14-million square feet of space, or more than 240 football fields. The hubs are scattered in major centers such as Mumbai, Delhi and Bangalore.

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The move by CPPIB is the latest among Canadian institutional investors looking to expand in India's growing economy at a moment when the country is benefiting from a pro-business government that is also committed to infrastructure development. Among the government policies that are expected to benefit logistics sites are the "Make in India" nation building effort that aims to boost India's profile as a design and manufacturing center, a new goods and services tax regime and ongoing growth in e-commerce.

"The strong fundamentals underlying the Indian manufacturing and retail sectors and growth in e-commerce, combined with the low stock of high-quality modern industrial real estate in the country, make this a compelling investment opportunity for a long-term investor like CPPIB," said Andrea Orlandi, head of real estate investments for CPPIB in Europe, in a statement. His investment department at CPPIB also recently bought into India's retail mall space.

At the same time, India's developing economy isn't without risks. The country is currently doing battle with a rising tide of bad debt that has eroded profits for many banks, according to the International Monetary Fund's recent global financial stability report.

Many banks need to set aside more capital to handle possible write-downs because of delinquent debts. "In more than a third of the banking systems in India and Russia, provisioning needs would amount to at least three years of net income, unless profits recover from cyclical lows," the report states. That puts the country in a position where both the banking system and corporate sectors are fragile. The pile of non-performing loans and stressed assets in the country has reportedly grown to between $150-billion and $180-billion.

These risks may deter some investors from seeking to take positions in India. For others, there could be opportunities in areas such as financial services or telecom and power where there are rampant distressed debt issues, but the assets that lie underneath are valuable.

Several Canadian funds have also been looking to increase their investment exposure to India. Brookfield Infrastructre Partners is among those with a keen interest in the country, signaling that it was "evaluating several other interesting opportunities in India to meaningfully expand our presence" in a recent letter to investors. Brookfield is particularly interested in toll road and telecom tower holdings, noting that the country has plans to privatize more than 70 road assets. And Brookfield already owns road projects in India.

The Caisse de dépôt et placement du Québec put an office in New Delhi last year and recently joined CPPIB in taking a small stake in lender Kotak Mahindra Bank Ltd., after the bank's executives were asked to lower their shares, according to a report from Reuters.

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The Canadian government is also seeking closer ties to India with a free-trade pact and a bilateral agreement on foreign-investment promotion and protection that would provide Canadian investors with more "predictability and certainty" in India. India's high commissioner to Canada recently said he hopes Prime Minister Justin Trudeau will visit India before the end of 2017.

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