Canadian pension funds face significant losses in real estate, prompting strategy overhauls and diversification
The largest fund, Canada Pension Plan Investment Board, experienced a five percent loss on its property portfolio in the last fiscal year due to a deepening commercial real estate slump, according to BNN Bloomberg.
The Public Sector Pension Investment Board faced a significant 16 percent loss on its real estate investments, marking the worst fiscal year performance for these assets since the global financial crisis.
Higher borrowing costs have disrupted the property market, impacting Canadian pensions known for their extensive real estate portfolios. This situation has prompted at least four major funds to significantly retool their operations.
Jo Taylor, CEO of the $248bn Ontario Teachers’ Pension Plan, said, “What’s worked famously well for the last 35 years may not work so well for the next five to 10.”
Taylor’s fund is experiencing its worst four-year run in real estate since acquiring Cadillac Fairview in 2000. Last year, Taylor shifted authority for most future real estate investments from Cadillac Fairview to in-house management, aligning them with the plan’s other asset classes.
Caisse de Depot et Placement du Quebec, the second-largest Canadian pension plan, reported a 6.2 percent loss on real estate investments in fiscal 2023, the worst since the pandemic hit three years earlier.
In January, the fund merged its real estate business with another unit specializing in property lending, expecting to save $100m annually.
These reorganizations signify a shift in approach for Canada’s pension funds, which have been dominant in the property market.
Despite managing only six percent of global pension assets, Canadian funds account for 60 percent of the total value of private real estate deals directly involving pensions, as per research from CEM Benchmarking and Sebastien Betermier at McGill University.
Cadillac Fairview has played a key role in expanding Toronto’s financial district and controlling many of Canada’s top-performing shopping malls.
However, higher interest rates and reduced lender activity have made real estate investing more challenging. The asset class has also become more global and specialized, with tighter margins and increased competition.
Jim Clayton, a professor at Toronto’s York University, noted, “The real estate sector is changing dramatically.” He added that the post-Covid shift in work and living patterns has accelerated these changes, leading to a re-evaluation of real estate investments.
Canadian funds are now adjusting their investment strategies and targets. CDPQ plans to involve co-investors or third-party managers in its real estate investments, rather than handling them independently, according to sources familiar with the matter.
Sebastien Betermier, a finance professor at McGill, observed that Canadian funds’ large real estate companies help them capture bigger margins but make them less agile. “Whenever you are deep into one subsidiary, you lose a little bit of flexibility,” he said.
Flexibility in real estate investing has become more important with the emergence of niche building types like warehouses, life science buildings, and data centres. Many Canadian pensions have invested in these assets and are seeking to increase their investments.
However, it remains difficult to be nimble with substantial legacy portfolios in office and retail properties, which have been hit hard by remote work and online shopping trends.
CPPIB recently sold stakes in three office properties at steep discounts, including a Manhattan property for just US$1, reducing its office exposure from nine percent to six percent of real assets by the end of March.
Ontario Teachers, traditionally focused on Canada through Cadillac Fairview, now aims to diversify its investments internationally. Taylor argues that this move is easier managed within the larger fund rather than through the real estate company.
“There are probably more decisions to reflect on, in terms of what we invest in next than perhaps what we’ve done in the past,” Taylor said.
Some funds are also reducing their overall property exposure. CPPIB’s real estate investments made up eight percent of its portfolio in fiscal 2024, down from 12 percent five years ago.
CEO John Graham stated, “We have other asset classes coming into the portfolio,” citing credit, energy, and infrastructure as areas for growth.
The Ontario Municipal Employees Retirement System (Omers) continues to hold onto its office properties. CEO Blake Hutcheson noted that while the buildings generate good income, their values were marked down by appraisers, resulting in a 7.2 percent slump in the real estate portfolio last year.
Omers integrates its real estate subsidiary, Oxford Properties, with other asset class teams, achieving synergies that other funds are now striving to replicate. “We don’t give them money and say, ‘Go spend it,’” Hutcheson said. “They go through the exact same process as our private equity business and the like.”
