Fitch Ratings reports that Canada's large pension funds face real estate losses but remain well-positioned
Canada’s large pension funds are experiencing increased losses from real estate investments, according to Fitch Ratings Inc., as reported by the Financial Post.
Despite this, the funds are well-equipped to handle near-term market fluctuations.
Dafina Dunmore, senior director at Fitch, stated, “Fitch believes Canadian pension fund investment portfolios will remain pressured by a challenging market backdrop, as the increased cost of debt and anticipated slower growth weigh on private asset valuations.”
The funds possess strong liquidity, which provides a cushion against investment volatility and flexibility to manage troubled investments. Dunmore emphasized, “They are not forced sellers of assets.”
As of December 31, 2023, the Canadian pension funds tracked by Fitch managed around $2.1tn in net assets. The report analyzed seven major Canadian pension funds:
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Alberta Investment Management Corp.
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British Columbia Investment Management Corp.
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Caisse de dépôt et placement du Québec
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Canada Pension Plan Investment Board
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Ontario Municipal Employees’ Retirement System
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Ontario Teachers’ Pension Plan
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the Public Sector Pension Investment Board.
Real estate values are being affected by higher borrowing costs, limited financing options, and asset repricing. Office properties are particularly impacted by the shift to remote work, and Fitch expects ongoing losses in Canadian pension fund office portfolios into 2025 as refinancing needs increase.
While Fitch has not observed widespread private credit losses, defaults are expected to rise for the remainder of this year and into 2025 due to higher debt service burdens and slowing growth.
Dunmore noted, “Pension funds that invest directly in private credit will be put to the test with respect to their workout capabilities.”
In response to market conditions and higher interest rates, Canadian pension funds are reallocating inflows and sale proceeds to government bonds.
In 2023, these funds were largely net sellers of private equity assets following several years of strong returns. Fitch expects further reductions in private equity but believes the funds will remain long-term investors in private assets.
