Canada's Pensions Worried About Brexit?
Some of Canada’s top pension funds, among the world’s biggest investors in British real estate and infrastructure, are holding back on U.K. deals until after Britons vote on whether to leave the European Union, according to senior executives.London's high end real estate bubble is already bursting for all sorts of reasons (Vancouver is next), and it's not just that rich Chinese, Russian, and Middle Eastern investors are a lot poorer.
These funds, which together manage more than $700-billion in assets, fear valuations could drop if Britain chooses to leave the bloc and have particular concerns about the impact on London’s financial district, the executives said.
There is no precedent for an economy as big as Britain’s leaving a trade bloc, and the rival campaigns paint contrasting pictures of what quitting the EU might mean for its trade.
Pro-Europe campaigners say banks and other financial institutions could pull operations out of the City of London if they cannot access critical EU markets.
An executive at one of Canada’s biggest public pension funds, who spoke off the record due to the sensitivity of the issue, said the risks posed by the June 23 vote were part of the reason it passed on a recent deal for an office property in London’s financial district.
“London is the financial centre of Europe, but if that changes, the whole trajectory is different. That’s become a factor in our thinking,” he said.
The retreat by Canadian investors could be harmful to the British economy and raises questions about whether other international investors will also lose their appetite for U.K. assets.
Canadian institutions have been the second biggest international investors in U.K. real estate over the past three years, with direct investments peaking in 2015. They are also prominent infrastructure investors.
The Canada Pension Plan Investment Board (CPPIB), which manages money for the country’s main government pension fund, had $15.2-billion invested in Britain at the end of March 2015, almost 6 per cent of its assets at that time.
Fund executives say they will still pursue exceptional one-off opportunities, pointing to the recent purchase of London City Airport by a group including three Canadian funds. But they note a stringent criteria would be applied to take into account the so-called Brexit risk, which would affect pricing.
“We’d want to go through what the different potential scenarios are – how the situations might evolve from a political, regulatory and economic perspective,” an executive at one of Canada’s top three pension funds said.
London City Airport was bought by a consortium including the Ontario Teachers’ Pension Plan (OTPP), the Ontario Municipal Employees Retirement System (OMERS) and the Alberta Investment Management Corporation (AIMCo) for more than 2 billion pounds ($2.82-billion).
AIMCo Chief Executive Kevin Uebelein, speaking to Reuters after the deal was announced, said that Brexit concerns were taken into account when negotiating.
“The prospect of Brexit was not unknown to us as we crunched those numbers. You factor those things into your investments,” he said.
Jonathan Simmons, chief financial officer at OMERS, which owns the high-speed rail link between London and the Channel Tunnel in partnership with (OTPP), said last month his fund was looking at how it can offset the risk to its U.K. holdings.
“We’re focused on what’s going on right now around Brexit, and of course we are monitoring that and we’re thinking about how we hedge our positions,” Simmons told a media briefing.
Brexit is not the only factor weighing on the market for London real estate.
Real estate agents say Chinese, Russian and Middle Eastern investors are cooling on London’s luxury property market as a result of factors including the low price of oil, the Russian ruble’s collapse, slowing Chinese economic growth and higher taxes for foreign buyers.
When you read that bond hedge funds are facing their worst 'quarter in history' or that the mighty Goldman Sachs is having a terrible quarter too, you have to ask yourself: who is going to bid up London and Manhattan real estate in this environment?
There's a reason why U.S. commercial real estate is getting hit and if you ask me, the weak CMBS market was a big factor in the Fed's decision to stay put on Wednesday (of course, the Fed will point to "global risks" but there are domestic risks too).
Is Brexit a big concern for Canadian pension funds? Of course it is but I don't think it's the only concern. And it certainly didn't deter Ontario Teachers', AIMCo, OMERS and Kuwait's sovereign wealth fund from snapping up London City Airport at a hefty premium (for the multiple they paid, they better have a great long-term strategic plan for this asset).
Moreover, while Canada's large pensions are on the global prowl, they're also focusing on domestic opportunities. Scott Deveau of Bloomberg reports, Canadian pension funds urge Trudeau to think big on infrastructure:
Canada’s largest pension funds have advice for Justin Trudeau’s government as it prepares to double its infrastructure investments over the next decade: follow the Australian model and think big.
The funds, which manage more than $760 billion in combined assets, say they need large projects like airports, toll roads and ports to justify their time and investment with so many global assets competing for their cash.
“What are we looking for? We’re looking for projects of scale,” said Mark Wiseman, chief executive officer of Canada Pension Plan Investment Board, the country’s largest pension fund with $283 billion in assets.
The Canadian government isn’t expected to provide extensive details of its infrastructure plan in the March 22 budget because it’s still developing a long-term strategy. Federal officials have said an extra $10 billion will be made available over the next two years while it crafts a broader strategy to deploy an additional $20 billion to each of three silos over the next decade: public transit, green infrastructure, and social infrastructure.
The country’s largest pension funds, including Canada Pension Plan, Caisse de Depot et Placement du Quebec, and Ontario Teachers’ Pension Plan, are encouraging the federal government to be ambitious for the longer-term strategy.
Canadian pension funds and money managers have become global leaders by investing in ports, toll roads, power plants and other infrastructure, deploying billions annually as they reduce risk in their portfolio through geographic diversification.
Home Grown
They’ve become so big, many have outgrown the opportunities at home, presenting a challenge for the Trudeau government as it seeks outside investment. The Canadian government estimates the infrastructure funding gap in the country is more than $150 billion, said Minister of Infrastructure and Communities Amarjeet Sohi.
Sohi is meeting various stakeholders, including mayors, premiers and pension funds, on how to bridge that gap.
“A key piece of engaging private investors is a significant long-term strategy,” he said in an e-mail interview last week. “We committed to doubling federal investment in infrastructure over the next decade, which will help ensure we have needed funding in place for critical infrastructure.”
Places like Canada are particularly attractive for infrastructure assets, with its strong rule of law, a progressive and predictable regulatory regime, and a talented managerial class, Wiseman said.
Mature Assets
“We’re very interested in investing in Canadian infrastructure under the right conditions,” he said “There’s no better place to invest than close to home.”
Canada Pension, like many other large global investors, would rather acquire mature infrastructure assets than finance new projects because they’re safer, Wiseman said. He encouraged the federal government to look to places like Australia or the U.K. as examples of how Ottawa could utilize the capital of these global funds to meet its own infrastructure needs.
In 2014, the Australian government established its Asset Recycling Initiative, in which the federal government grants 15 per cent of the sale price of privatized infrastructure assets to states and territories. The federal funds and proceeds from the sales are used to develop new projects.
The Australian government estimates the initiative could spark as much as A$32 billion (US$24 billion) in new infrastructure investment, and global investors have taken notice.
Last year, US$52 billion was invested in Australian companies from foreign buyers, including a record US$16.4 billion from Canadian investors, according to data compiled by Bloomberg. Canada Pension was part of a group that agreed to buy Asciano Ltd. in a deal announced Tuesday valuing the Australian port and rail operator at A$9.05 billion.
Quebec Model
Montreal-based Caisse, Canada’s second-largest pension fund, led a consortium last November to acquire Transgrid, a network of high-voltage power lines, from the State of New South Wales for US$7.4 billion.
The challenge for larger funds to invest in traditional public-private-partnerships is that the equity stake — and in turn the reward — is often too small for them to pursue, said Andrew Claerhout, head of the infrastructure group for Ontario Teachers’.
Projects like the Gordie Howe International Bridge in Windsor, Ontario may cost billions to build but only require an equity investment of $150 million or less because the private partners can load their investments up with debt with the government’s support, he said.
“If we were going to do that to deploy $150 million that means we wouldn’t be able to do a bunch of other things. So you have to think about returns on effort and on capital,” he said.
Ring RoadMy advice to our Minister of Infrastructure and Communities Amarjeet Sohi is to listen very carefully to Mark Wiseman, Michael Sabia, Michael Latimer and other leaders at Canada's Top Ten pensions and adopt the Australian model for developing infrastructure and THINK BIG!!!
Canadian projects that might attract interest include a possible ring road around Toronto, he said. Another example would be the Metro Toronto Convention Centre, according to Michael Latimer, chief executive of the Ontario Municipal Employees Retirement System.
Michael Sabia, CEO of the Caisse, said he’d like to see the government follow his lead. Last year, the Caisse struck a deal to build and run infrastructure projects that Quebec is ill- equipped to fund itself.
The Caisse is working on two projects in Montreal, including a light-rail corridor on the new Champlain Bridge and a public transit system linking downtown to Trudeau International Airport and West Island. The combined value of those projects is estimated to be about $5 billion.
“We think that’s a creative way for the government to invest in infrastructure and in a way that makes it fiscally manageable,” Sabia told reporters earlier this month.
The federal government has outlined some broad strokes of its plan, including developing an Infrastructure Bank that would give out loans using its government credit rating.
Sohi said it’s too early to say whether he would eventually adopt a broader strategy, like the Australia model, to attract global pension and sovereign-wealth funds.
“We are in a consultation phase and are not ruling out any option,” he said.
The problem in Canada is we think small and spend way too much time studying proposals which is fine when the economy is doing well, but now that the economic crisis is spreading (never mind what the media is reporting), the Trudeau Liberals better get a move on and start delivering on infrastructure.
Once again, take the time to listen to a presentation Michael Sabia, CEO of the Caisse, delivered back in November at the the 23rd Annual CCPPP National Conference on Public-Private Partnerships. You can view his entire presentation by clicking here. It's a little long but it's well worth listening to.
Below, Prime Minister Justin Trudeau says OAS eligibility age to be restored to 65 in 1st Liberal budget. This decision represents strike 2 on pensions for this Liberal government which loves pandering to Canada's "working poor" but doesn't think about the consequences of such actions (scaling back the TFSA limit and dropping the retirement age are both dumb decisions).
At least Trudeau alluded to enhancing the CPP in this interview. Let's hope his Liberals don't drop the ball on that and listen closely to what Canada's pension fund leaders are telling them to do on infrastructure.
Comments
Post a Comment