Pension funds partner
It's been common in recent months to talk about the wall of capital looking for prime investment opportunities, particularly in the real estate sector.
"There's a wall of money wanting to invest in real estate," Bob Levine, a principal with Avison Young in Vancouver, told commercial real estate association NAIOP last fall. "There's a lot of money coming from the man in the street through limited partnerships, private syndications. ... Demand is absolutely going to continue."
Indeed, preliminary figures from Avison Young suggest that 2012 was a record-breaking year with $2.6 billion worth of deals done in the province (and that's just properties worth $5 million and up).
But for major pension funds, a scarcity of opportunities is driving many to pursue redevelopment opportunities of existing assets or brand new construction altogether.
While the country's five major pension funds have the office market cornered in Vancouver's core, collectively holding more than 40% of the downtown inventory, BC Investment Management Corp.'s (BCIMC) recent deal for the Canada Post building at 349 West Georgia Street highlights a new style of investment.
BCIMC acquired the property for $159 million, said Kirk Kuester, managing director of Colliers International in Vancouver, but redevelopment will hand it an asset worth something closer to a half-billion dollars.
"It'll be office and retail and hotel at the end of the day," Kuester said.
Similarly, Ivanhoe Cambridge is pursuing redevelopment of the Oakridge Shopping Centre, adding value to it through expanded retail space, high-density residential units and other uses, while Healthcare of Ontario Pension Plan (HOOPP) is partnering with Shape Properties Corp. in the transformation of Brentwood Town Centre, which they acquired in 2010.
HOOPP is also creating new assets, partnering with Shape on Highstreet, a 565,000-square-foot shopping complex at Mt. Lehman Road in Abbotsford, while Triovest Realty Advisors Inc. and PCI Group are developing Marine Gateway in Vancouver and King George Station in Surrey.
Small-cap challenges
Nationally, the Pension Investment Association of Canada reports that pension funds now hold $89.9 billion worth of real estate – more than triple their holdings in 2001.
Kirk Kuester of Colliers International said the major pension funds have led the growth, with 13% to 15% of their portfolios allocated to real estate.
"And that's on the move – we expect within probably three to five years that average will be in the 18% to 20% range," he said.
But for pension funds as a whole, real estate represents a smaller fraction – by some estimates, less than 5%.
This is not only because smaller funds find real estate very resource-intensive, requiring large commitments of cash and, when it comes to management, time. There's also a scarcity of assets that shut out smaller players.
Jarvis Rouillard, vice-president, investments with Triovest Realty Advisors Inc., said the hurdles make its partnership with PCI Group on Marine Gateway and King George Station exciting for the institutional and private funds it represents.
"They're seeing that as an opportunity for them to get into high-quality, big-scale, mixed-use, on-transit developments," he said. "Otherwise they wouldn't have access to those types of opportunities."
