Tuesday, May 28, 2013

Caisse Unloading European Properties?

Frederic Tomesco of Bloomberg reports, Caisse de Depot Sells Europe Properties Amid ‘Dark Night’:
Caisse de Depot et Placement du Quebec is selling some of its European property and redeploying proceeds in assets such as infrastructure while the euro-area economy shrinks, Chief Executive Officer Michael Sabia said.

About 20 percent of the Caisse’s C$18 billion ($17.5 billion) of real estate assets are in Western Europe, according to its 2012 annual report. Canada’s largest public pension-fund manager oversaw net assets of about C$176 billion at the end of last year, including C$6.31 billion in infrastructure such as toll roads and a stake in London’s Heathrow Airport.

“We are selling real estate assets in Europe,” Sabia said in an interview yesterday at the Bloomberg Canada Economic Summit in Toronto. “Real estate pricing among top quality, platinum-quality assets -- the pricing is quite good, and we are trying to benefit from that and in some other asset categories as well, where selectively asset prices are high.”

The euro-area economy contracted 0.2 percent in the first three months of 2013, data from the European Union’s statistics office showed last week. That extended the recession in the zone to a sixth quarter.

While stressing “it’s the right time to be counter-cyclical in Europe,” Sabia said he and his investment team will approach investing in the region with extreme caution. The Caisse had 7.2 percent of its total assets in the euro region at year-end, according to its annual report.
‘Dark and Foggy’

“There’s a dark night going on in Europe, a dark and foggy night where bad things come out of trees and bite you,” Sabia said. “It’s a pretty scary place. In Europe there are investments to be made, and I think it’s possible to be successful there but there’s no place in the world, other than maybe emerging markets, where the word selectivity is fundamentally important.”

Sabia didn’t specify which European properties the Caisse is planning to sell.

On May 7, the Caisse’s Ivanhoe Cambridge real-estate unit sold the Paris building that houses the headquarters of Vivendi SA to French insurer Assurances du Credit Mutuel. Terms of the deal weren’t disclosed.

In addition to infrastructure, cash from asset sales may be reinvested in distressed debt or “situations where a current shareholder needs to liquidate an asset,” Sabia said. “We are trying to, in effect, help build our future by trying to benefit frankly from some of the issues and difficulties that other institutions in Europe have right now.”
Private Equity

Sabia, 59, said in January that the Caisse plans to add C$10 billion to C$12 billion in what it calls less-liquid investments in the next two years. The fund manager seeks to have about 30 percent of its assets in private equity, real estate and infrastructure by the end of 2014, up from 25 percent, the CEO said at the time.

Real estate was one of the best performing asset classes for the Caisse last year, returning 12.4 percent. The pension fund manager’s overall return was 9.6 percent.
Real estate has been one of the best performing asset classes for the Caisse ever since it was introduced in the early 80s which is why it plans to increase its holdings over the next two years, along with those of other illiquid asset classes like private equity and infrastructure.

So why is the Caisse selling some of its European real estate assets? As Michael Sabia said, the pricing for top quality assets is quite good and they want to benefit from the environment where selectively asset prices are high.

Does this mean the Caisse is scaling back its real estate portfolio? Not at all, and let me clarify some of the figures being thrown around, including some I've quoted on my blog because it gets confusing. The consulting firm bfinance wrote an interesting comment, Investors show renewed interest in commercial real estate, where it stated the following:
Some of the world’s largest pension funds and SWFs are showing renewed interest real estate, with Canada’s C$160bn (now $176B) Caisse de Dépôt et Placement du Québec saying it intends to increase its real estate allocation from C$30bn to C$40bn during the next 18months.

This will make Caisse one of the world’s largest property investors, as pension funds despair of the low yields on bonds. In January, it completed a £265m deal with private equity group TPG to buy the Woolgate Exchange building in the City of London, but it plans to allocate the bulk of its new property spending to the US and China, where it will build a portfolio of shopping centres.
If you look at the Caisse's latest annual report, the allocation to real estate as of December 31st, 2012 is 10.3%, or C$18 billion of total net assets of  $176.2 billion. The Caisse does plan to increase its holdings of less liquid asset classes by C$10 billion to C$12 billion over the next two years but that includes real estate, private equity and infrastructure.

From Ivanhoé Cambridge's 2012 activity report, you will see the fair value of their real estate assets and real estate investments at the end of 2012 was C$30.3 billion and $C4.5 billion respectively, but those figures include debt and partnerships with other funds and are not net asset values reported in the annual report.

Mixing up net and gross assets leads to confusion in some articles. On a gross basis, Ivanhoé Cambridge does manage over $30 billion and this will grow significantly over the next couple of years, cementing the Caisse's position as one of the most influential real estate investors in the world. In terms of market influence, the fair market value reported, which is gross assets and includes partnerships, is what articles often discuss. In terms of reporting results, however, it's net assets that count.

The $10 billion increase in real estate assets over the next 18 months in the bfinance comment refers to gross assets and is in line with what was reported in an article Nicolas Van Praet of the National Post wrote back in April, Ivanhoe Cambridge clinches US$1.5-billion housing deal, its largest ever:
Ivanhoe Cambridge has pulled the trigger on its largest ever housing deal, joining partners in a slate of multi-residential properties in the United States worth US$1.5-billion.

Ivanhoe said it bought into a portfolio of 27 residential properties containing 8,010 units in all with partners including investment banking firm Goldman, Sachs & Co. and apartment operator Greystar Real Estate Partners. The assets are located in Washington, D.C. and northern New Jersey, South Florida, the San Francisco Bay area, southern California, Phoenix and Denver. Goldman and Greystar bought the properties from Equity Residential with Ivanhoe investing later.

Ivanhoe, the real estate arm of the Caisse de dépôt et placement du Québec, plans to spend an estimated $10-billion on new property as it speeds up asset purchases over the next 18 months. Half of that amount could be deployed in the United States, Ivanhoe global investments president Bill Tresham told the Financial Post in an interview in February.

The club deal announced Tuesday is one of Ivanhoe’s largest investments of the past few years and its largest ever in the multi-residential asset class. Its share of the agreement was not disclosed.

The company is slowly divesting assets including hotels to focus on residential units, office buildings and shopping centres where returns are more predictable. Real estate values in the United States are about 80% of their peak before the last recession whereas values in Canada are at record highs, Mr. Tresham said.

“The number one goal for us geographically is to have more capital invested in the United States,” he said. “We’re finally this year mobilized to really get it done.”

Ivanhoe said the partners have agreed to launch a multi-year maintenance and renovation investment program for their new assets. Most of the income-producing housing were built in between 1990 and 2000 and are located in key U.S. suburban markets.

The high price of Canadian real estate means sellers are getting top dollar for their investments as they move to deploy cash elsewhere.

Ivanhoe’s ownership partner in Montreal’s Place Ville Marie office tower, Alberta Investment Management Corp., is seeking to unload its stake in the building. Under their partnership, Ivanhoe is believed to have the right to match any offer AIMCo receives.
I've covered the Caisse's investments in U.S. multi-family real estate and stated that even though some markets are pricey, they believe the economy and demographics are favorable going forward and I agree.

The focus on U.S. real estate is understandable given the recovery is well underway there. Europe is back from the brink but it's still a mess and the risk of a prolonged downturn remains high, especially in periphery economies, but core economies are also slowing.

Nonetheless, insitutional investors are increasingly looking at European real estate and bfinance notes there has been a "flood of money from SWFs, private equity groups and large pension funds targeting assets in London, Paris and Munich, with a sharp swing towards industrial property." This is leading to yield compression and rising risks in some markets:
... experts warn of yield compression as the flood of money into some areas, whether geographic (London, Paris, Frankfurt) or strategy specific (core, inflation-linked long lease), is creating far greater risk on capital invested down the line than investors may realise in their quest for short term cash yield.

In some areas, the flood of money has compressed yields to extremely low levels. For example, long lease, inflation-linked real estate with quality tenants, such as supermarket operators, have dropped below 5%, and even as low as 4.25%. Furthermore, the terms of the leases on such properties have weakened.
The compression in yields in some European markets and sectors is surely one of the reasons the Caisse is taking advantage of the "flood of money" to unload selective assets in the euro region. That's what makes a market, buyers and sellers.

Other Canadian pension funds continue to invest heavily in hot European markets. Ed Hammond of the FT reports the Queen’s property company  has teamed up with one of Canada’s largest pension funds in a £320m deal that underlines the burgeoning relationship between big business and aristocratic ambition:
The Crown Estate, which manages an £8bn property empire on behalf of the sovereign, will work with Ontario Municipal Employees Retirement System on a 270,000 sq ft development of shops, restaurants and offices in St James’s, the central London heartland of the UK hedge fund industry.

The deal marks the latest in a trio of lucrative joint ventures the Crown Estate has entered into with foreign investors. The company is among a handful of large, predominantly London-based landed estates, to have abandoned the traditional business model for hereditary property portfolios by swapping passive rent collection for active asset management.

Under the terms of the deal with Oxford Properties, the real estate division of Omers, the Crown Estate will use the investment to fund a phase of its £1bn overhaul of the St James’s Market area.

The deal, to be announced this week, marks a rare opportunity for an outside investor to gain access to a large area of commercial property in the tightly controlled West End.

Demand for office space in St James’s and Mayfair has risen sharply in the past two years, with rents among the highest in Europe. Average prices in the West End reached £92.50 a square foot at the end of last year, compared with £55 a square foot in the City of London.

As well as co-investor, the Crown Estate will act as development manager on the project.

One of the reasons for seeking a funding partner for the project is that the Crown Estate is not allowed to be in debt. In 2011, it sold a 25 per cent stake in Regent Street for £450m to Norges Bank Investment Management, Norway’s NKr4tn ($720bn) oil fund. The company is also working on a £100m project in London with the Healthcare of Ontario Pension Plan.

The Queen has no powers to liquidate assets belonging to the Crown Estate and cannot buy or sell properties, but she is entitled to a modest slice of the company’s revenues. Under an agreement struck between King George III and the government in 1760, the portfolio was managed by the Crown on behalf of the state, with surplus revenue going to the Treasury. In turn, the Treasury made a fixed annual payment to the monarch.

The agreement was overturned in 2011, however, and replaced with the Sovereign Grant Act, under which the Queen will this year receive 15 per cent of the Crown Estate’s revenues.

In addition to the West End estate, the Crown Estate owns 106,000 hectares of farmland, 14 regional shopping centres and most of the seabed to the 12 nautical mile territorial limit.
St Jame's Market area is flourishing again after the 2008 crisis and many of the world's best hedge funds and private equity funds operate in that area. If the boom in alternative assets continues, the overhaul of that area will be extremely lucrative for Crown Estate and OMERS.

Below, Hans Vrensen, global head of research at DTZ, talks about commercial real estate in London and investment opportunities outside of the U.K. capital. He spoke May 16 with Bloomberg's Neil Callanan in London.

And Bruce Ratner, executive chairman of Forest City Ratner Cos., talks about the New York City real estate market. Speaking with Tom Keene, Sara Eisen and Scarlet Fu on Bloomberg Television's "Surveillance," Ratner also talks about his bid to rehabilitate Nassau Veterans Memorial Coliseum in Uniondale, New York and talks about how the runup in NYC condo prices is 'unnerving'.