Caisse Cautious on London Real Estate?

Matt Scuffham of Reuters reports, Canada's Caisse cautious on London amid Brexit fears:
Caisse de depot et placement du Quebec, one of the world's biggest real estate investors, is holding off on major investments in London real estate amid uncertainty over the impact of Britain's planned exit from the European Union.

Canada's second-biggest public pension fund has been an enthusiastic investor in Britain and earlier this year agreed to finance the expansion of London's Heathrow airport in which it is one of the biggest shareholders.

Until recently, London was one of the cities the Caisse was most committed to investing in along with New York and Shanghai.

"That is still certainly true for Shanghai, true for New York," Caisse Chief Executive Michael Sabia told Reuters in an interview on Wednesday.

However, the Caisse has turned more cautious on Britain's capital after Prime Minister Theresa May lost her majority in a parliamentary election in early June, giving her a weaker hand in negotiating Britain's exit from the EU.

"We're pretty cautious right now about making meaningful and significant investments in London real estate," Sabia said.

The Caisse has not seen any impact yet on valuations of its existing real estate portfolio in London which is primarily in high-end office buildings. However, Sabia said valuations of less desirable properties were being affected.

"The question is how far does this go, does it spread? That is why we're being careful until we have a better sense."

Sabia also said Britain's economy, which initially withstood the shock of the Brexit vote, was starting to hurt.

"I think you're going to see slowing in the UK as the reality of Brexit begins to affect decision making more, I think we're already seeing some of that."

The Caisse, which manages public pensions for retirees in Quebec, has a dual mandate both to maximise returns for depositors and support economic growth in the Canadian province.

A $1.5 billion investment in Bombardier (BA.N), headquartered in Quebec, has been slammed by U.S. rival Boeing (BA.N) as an unfair subsidy but Sabia rejected that characterisation as "absolute nonsense" on Wednesday.


Caisse is embarking this year on the construction of the world's third-biggest public transit system in its home city of Montreal, a groundbreaking project which will see the pension fund take responsibility for both the funding and construction.

The C$6 billion project, which has also received funding from the Quebec government and Canada's federal government, is seen as a test case by other pension funds which normally prefer to invest in 'brownfield' infrastructure that has already been built rather than take on the construction risk through a 'greenfield' project.

But competition for assets such as roads, bridges and tunnels that have already been built has intensified as investors look for alternatives to low-yielding government bonds and volatile equity markets.

Sabia said he believes the Caisse will have an advantage over rivals from developing the skills in-house to manage the construction of new infrastructure and wants to replicate the model in the United States and Europe if it succeeds.

He also argued that much infrastructure development falls between the two, citing Heathrow Airport, where the infrastructure is being expanded, labelling them 'khaki' projects.

"You've got to have the capacity to work across that spectrum, to have a full product offering is something that's going to differentiate yourself in the market."

The Caisse invests money on behalf of workers and retirees in the province of Quebec and Sabia admitted that there would be reputational risk if money was lost on the Montreal transit project.

"Doing things differently and some degree of innovation always comes with some risk. If those reputational issues are so big in your mind then you're condemned to live in the status quo for ever.

"In an investment world that's changing as much as we think it is changing, staying in the status quo means you're toast."
There are two parts to this article. The first deals with the effects of Brexit on the UK economy.

Swati Dhingra, Gianmarco Ottaviano, Thomas Sampson and John Van Reenen of LSE's Centre for Economic Performance published a paper, The consequences of Brexit for UK trade and living standards, which you can read here.

Their main findings are listed below (click on image):

The authors of this paper even quantified the effects of Brexit on UK livings standards under an optimistic and pessimistic scenario (click on image):

As you can see, the effects of Brexit on UK living standards are not good under both scenarios but are particularly terrible under the pessimistic scenario.

Now, these are academic studies and critics will claim they're too gloom and doom. Still, it's clear that Brexit will have an impact on trade and UK living standards, we just don't yet how this will all play out.

As far as London, the financial center of Europe, there are some diverging views among Canada's large pensions. PSP Investments, the other large pension fund in Canada, opened a London office recently which it considers its European growth hub.

However, just like Michael Sabia,  PSP's CEO André Boubonnais, is equally cautious on UK real estate and infrastructure. The latter believes London will continue to be the financial hub of Europe but he too is very cautious when it comes to making big investments in UK's private markets (PSP's main focus is on expanding private debt operations in Europe but it is looking at investments in infrastructure and real estate).

My thoughts on London? It's a global financial center just like New York and to a lesser extent Toronto. In other words, a long bear market or profound shock in the markets aren't too bullish for London, New York or Toronto.

London also houses some very large well-known hedge funds like Brevan Howard which hasn't been performing too well lately. Troubles in Hedge Fund Land don't typically bode well for commercial real estate in large financial centers but the rise of technology juggernauts has helped ease the burden of relying too much on financial firms.

Anyway, the Caisse's real estate subsidiary, Ivanhoé Cambridge, is among the biggest and best real estate investors in the world so I'm confident they know what they're doing when it comes to their decision to be more cautious in terms of London real estate.

As far as the second part of the article, it deals with Michael Sabia's baby, the C$6 billion Réseau électrique métropolitain (REM) project. I recently discussed my thoughts on this project when I went over Ontario Teachers' new infrastructure approach, stating this:
[...] this is one approach. Another approach is what the Caisse is doing now with its massive REM project, which is a purely direct greenfield project. The Caisse got a loan from the Quebec government and will receive money from the federal government too, but what Macky Tall and his team are doing in Montreal is unlike anything any large Canadian pension is doing in infrastructure.

[Note: The Caisse de dépôt et placement du Québec just received confirmation of a $1.283-billion investment, by the Government of Canada and Prime Minister Justin Trudeau, in the Réseau électrique métropolitain (REM) project.]

I just finished covering the International Pension Conference of Montreal and PSP's fiscal 2017 results where I noted that PSP's CEO André Bourbonnais is concerned about investor complacency and rightfully warned institutional investors are underestimating valuation and regulatory risks of infrastructure, mistakenly looking at these investments as a substitute for bonds.

In a private conversation with me at last year's pension conference, Leo de Bever, AIMCo's former CEO, told me he thought some of the infrastructure deals were being priced at "insane levels". I can't tell you which deals he mentioned (will let you guess), but he did add this: "what the Caisse is doing with this greenfield infrastructure project is truly innovative and can pay off in a huge way if they get it right."

I agree. There is no large pension in the world which is doing anything close to what the Caisse is doing in terms of a purely direct major greenfield infrastructure project where it controls everything from A to Z.

In order to do this project, CDPQ Infra went out and recruited people with the requisite skill-sets, people with operational experience developing and managing mammoth greenfield projects (not just MBAs and dealmakers but engineers with MBAs who worked at large construction engineering companies like SNC Lavalin and elsewhere).

This is why I was so disappointed to learn that the new Canadian Infrastructure Bank will be based in Toronto. I respect Jim Leech but in my humble opinion, Montreal, not Toronto, should have been the first and only choice as the headquarter this new federal infrastructure bank and I would have placed someone like Bruno Guilmette, PSP's former head of Infrastructure or someone else I know well as the head of this bank (I'm getting a bad feeling that this new infrastructure bank is going to be staffed by the wrong type of people).
In my opinion, Toronto was chosen as the headquarters of the new federal infrastructure bank because it is the financial epicenter of Canada and all the big pension funds are based there. Still, this decision irks me because Montreal needs a new federal Crown corporation based here (apart from the BDC) and we have plenty of infrastructure expertise that Toronto doesn't have. The Caisse's REM project is a testament to such world class expertise.

Anyway, even if it's headquartered in Toronto, hopefully they will staff this new infrastructure bank with the right people, not just a bunch of cowboy dealmakers.

[Note: A friend of mine reminded me that Toronto has the best infrastructure fund in the world, "it's called Brookfield and they are eons ahead of everyone else." Good point.]

Once again, if you have any thoughts on this comment or want to add anything, feel free to email me your thoughts at and I will be glad to post your comments.

Below, Lindsey Naylor on the macroeconomic impact of Brexit on the domestic economy, and the importance of regulatory matters in sustaining the ability of UK-based firms to face European clients.
Ms Naylor was speaking at the LSE Growth Commission’s Evidence Session on Finance and the City of London held at the Army and Navy Club on 6 December 2016. She is Partner in Oliver Wyman’s Global Corporate & Institutional Banking practice.

And on June 15, 2017, in Montreal, Prime Minister Justin Trudeau, Quebec Premier Philippe Couillard, Montreal Mayor Denis Coderre, and Michael Sabia, President and CEO of the Caisse discussed the federal government’s investment in Montreal’s Réseau électrique metropolitan (REM) light-rail network. Following the announcement, the prime minister, premier, and mayor respond to questions from reporters (in both French and English). You can watch it here.

Lastly, André Bourbonnais, president and CEO of PSP Investments, joins Bloomberg TV Canada’s Lily Jamali to discuss opportunities in the private debt market and his plans to expand globally. Listen carefully to his views on London, this is a great interview.