CPPIB's Big Investment in Chinese Properties?

Rajeshni Naidu-Ghelani of CBC News reports, CPPIB to invest $800M in Chinese real estate developments:
The Canada Pension Plan Investment Board (CPPIB) will invest $800 million in two new property developments in China by developer Longfor Properties, it announced on Monday.

The projects include a 740,000 square metre residential and commercial development in Western Chinese city Chengdu. The city has a population of 16 million.

The other is a 340,000 square metre development in South Minhang, which is a suburb of financial capital Shanghai.

The developments will both include a shopping mall.

"Both cities are well positioned to capitalize on the future economic growth and harness the returns of growing consumption in China," said Jimmy Phua, head of real estate investments Asia, CPPIB.

He added the move was part of the pension board's strategy to grow real estate investments in China, particularly in the fast-growing retail sector.

"The investments will help CPPIB diversify its real estate interests in China, providing attractive risk-adjusted returns over the long term," he said.

Market regulation

The announcement comes as policymakers in the world's second largest economy embark on curtailing real estate speculation as home prices continue to surge.

More than 100 cities have imposed measures to crack down on speculative buying with Chinese President Xi Jinping emphasizing that "houses are built to be lived in, not for speculation."

Housing data released last week showed that the measures were starting to take affect with new home prices rising just 5.3 per cent in December from year ago, compared to 12.4 per cent in 2016.

On Monday, the Shanghai government also announced that it would continue to strengthen regulation of the city's property market.

Investments in China

Meanwhile, the deal between CPPIB and Longfor is the third of its kind after a 2014 $234 million deal for a similar project in eastern city Suzhou, followed by a $193 million investment in 2016 for a mall in southwestern city Chongqing.

Zhao Yi, chief financial officer, Longfor Properties said the new projects are ideally located high-quality assets that are expected to offer strong returns.

"Our expertise in real estate development as well as in mall operations and management will help us deliver value to our shareholders and partners," he said.

The services sector in China was one of the big drivers of better-than-expected economic growth last year, according to gross domestic product (GDP) data released last week.

The services industry grew 8.3 per cent in the fourth quarter from a year ago and accounted for almost half of the GDP by value.

Real estate, meanwhile, contributed 6.3 per cent to the economy in the same time frame.
CPPIB put out a press release, Canada Pension Plan Investment Board extends cooperation with Longfor Properties to develop mixed-use sites in Chengdu and Shanghai, China:
Canada Pension Plan Investment Board (CPPIB) and Longfor Properties Co. Ltd (Longfor) announced today they are extending their cooperation to include two new mixed-use real estate development projects in Chengdu and Shanghai in China, for a total CPPIB commitment of approximately RMB 4,200 million (C$800 million).

“We are pleased to extend our existing relationship with Longfor Properties, one of the top real estate developers in China, through these development projects in Chengdu and Shanghai. Both cities are well positioned to capitalize on the future economic growth and harness the returns of growing consumption in China,” said Jimmy Phua, Managing Director, Head of Real Estate Investments Asia, CPPIB. “These projects deliver on CPPIB’s strategy to grow our investments in the Chinese real estate sector, specifically in the fast-growing retail sector. The investments will help CPPIB diversify its real estate interests in China, providing attractive risk-adjusted returns over the long term.”

The mixed-use development project in Chengdu, the capital of Sichuan province with a population of 16 million, is comprised of approximately 740,000 square metres for residential and commercial use. The project is attractively and ideally situated in the East part of Chengdu and contains excellent commercial transportation links, offering great accessibility to the city centre. The site will include a Paradise Walk shopping mall of approximately 140,000 square metres. The large residential component is expected to service the increasing residential demands of Chengdu.

The Shanghai site is approximately 340,000 square metres and is situated in South Minhang, one of the city’s fast-growing suburban areas. The project will comprise retail and commercial components and is ideally located in terms of transport links and its proximity to two universities, as well as the Zizhu technology hub. It, too, will include a Paradise Walk shopping mall.

“We look forward to further extending our cooperation with CPPIB. These investments are another set of landmarks in our work together, following the Suzhou Times Paradise Walk and Chongqing West Paradise Walk projects,” said Zhao Yi, Executive Director and Chief Financial Officer of Longfor Properties. “The mixed-use sites in Chengdu and Shanghai are both ideally located, high-quality assets that are expected to offer strong future returns. Our expertise in real estate development as well as in mall operations and management will help us deliver value to our shareholders and partners.”

Longfor is a well-established residential and retail mall developer and operator in China, and has built a strong brand, experienced retail team and a wide network of local and international tenants in the Paradise Walk malls.

CPPIB and Longfor first collaborated in 2014 with a mixed-use real estate project in Suzhou, which included the development of a Paradise Walk mall.

About Canada Pension Plan Investment Board

Canada Pension Plan Investment Board (CPPIB) is a professional investment management organization that invests the funds not needed by the Canada Pension Plan (CPP) to pay current benefits on behalf of 20 million contributors and beneficiaries. In order to build a diversified portfolio of CPP assets, CPPIB invests in public equities, private equities, real estate, infrastructure and fixed income instruments. Headquartered in Toronto, with offices in Hong Kong, London, Luxembourg, Mumbai, New York City, São Paulo and Sydney, CPPIB is governed and managed independently of the Canada Pension Plan and at arm's length from governments. At September 30, 2017, the CPP Fund totalled C$328.2 billion.For more information about CPPIB, please visit www.cppib.com or follow us on LinkedIn or Twitter.

About Longfor Properties Co. Ltd.

Longfor Properties is a premier developer engaged in property development, investment and management in China. With its business spanning 35 cities throughout China, Longfor Properties serves a wide spectrum of customers, including the upper class, middle class and mass markets. The Group’s product offerings range from high-rise apartment buildings, low-rise garden apartments, townhouses, detached villas, as well as shopping malls and other commercial properties.

Being one of the first developers of shopping malls in China, Longfor has been operating commercial properties for over 15 years. To date, it has opened 26 shopping malls with a total area of over 2.6 million sq.m, and working with over 3,800 merchant brands. For more information, please visit www.longfor.com.
With this investment, CPPIB has invested roughly $1.2 billion of its assets with Longfor, one of the top real estate developers in China.

In fact, for those of you who don't know, Wu Yajun, co-founder and Chairwoman of Longfor Properties, is one of the top ten real estate tycoons and one of the top ten most outstanding businesswomen in China. Here she is posing during a press conference for Longfor Properties in Hong Kong (March, 2014):

If you're going to invest in commercial real estate in China, it helps to have the right partners who know how to navigate the terrain. Longfor is one of the ten best-performing Chinese property companies.

And from the press release:
Being one of the first developers of shopping malls in China, Longfor has been operating commercial properties for over 15 years. To date, it has opened 26 shopping malls with a total area of over 2.6 million sq.m, and working with over 3,800 merchant brands.

It’s clear Longfor has an expertise in developing shopping malls but this deal also includes residential properties.

As far as Chengdhu, China, it's not as popular as Shanghai, but some think it's a beautiful and growing city that should be part of your bucket list. In particular, one of the city’s most famous neighborhoods, the Wide and Narrow Alley is a series of ancient streets and courtyards, which today are home to some of Chengdu’s toniest shops and restaurants.

While this deal is sizable in terms of dollars, it's important to note that emerging market public and private equities represent 5.7% and 1.8% of the total portfolio of $317 billion as of last March and emerging market real estate is less significant in terms of the overall portfolio (especially Chinese real estate).

A full discussion on CPPIB's Real Estate is beyond the scope of this post but you can get some details from pages 64-65 of the Fiscal 2017 Annual Report. The key highlights:
Fiscal 2017 marked another year of steady growth for the Real Estate Equity portfolio, which at the end of the year totalled $40.1 billion, an increase of 9.2% from fiscal 2016. The Equity programs represent 89.3% of the overall real estate portfolio and 54.5% of the Real Assets portfolio. A slowdown in new investment activity and valuation gains coupled with an active dispositions program resulted in moderate growth in the portfolio in fiscal 2017 compared to previous years. Specifically, the value increase in the portfolio was the result of several factors: (i) $4.6 billion in new investment activity, (ii) valuation increases mainly due to improved market conditions and foreign exchange of $1.6 billion, offset by $2.8 billion in return of capital from asset sales.

At year-end, the Real Estate Equity portfolio consisted of 121 investments with 60 operating partners, managed by a team of 75 professionals across six offices globally. The Real Estate Equity portfolio remains well diversified across major markets globally, with 86% in developed markets such as North America, Western Europe and Australia and 14% in the emerging markets including China, India and Brazil.
So, 14% of the $40.1 billion Real Estate Equity portfolio is invested in China, India, and Brazil and most of this is in Brazil and India. Investing in China's commercial real estate is a relatively new venture in terms of CPPIB's Real Estate group but one that will grow significantly over the next decade(s).

Also, when looking at the overall CPPIB portfolio which is now close to $330 billion, only $1.2 billion is invested in projects with China's Longfor and in terms of the overall portfolio, investments in China's commercial real estate market are small and still insignificant.

This is a good thing because CPPIB is a very long-term investor and will be able to capitalize on the inevitable dislocations that will happen in China's real estate market over the next 50+ years to build a nice portfolio of real estate assets there.

Am I bullish on China and emerging markets right now? Not particularly, I see a significant slowdown ahead but this is irrelevant for a long-term investor like CPPIB which is buying and holding these private market assets for longer than a cycle, in some cases decades.

Let me end by stating once more that the key for Canada's large pensions when it comes to investing in private markets is to find the right partners. This is especially true when investing in China where the right partners play a bigger role in terms of a deal's success.

Below, from Davos last week, Mark Machin, president and chief executive officer of Canada Pension Plan Investment Board, discusses asset-price returns, inflation and emerging markets. He speaks with Bloomberg's Erik Schatzker at the World Economic Forum's annual meeting in Davos, Switzerland. Watch the interview here if it doesn't load below.

This is an excellent interview where Mark explains CPPIB's long-term strategy for investing in public and private markets in emerging markets. He also explains CPPIB's massive hedge fund portfolio and how they see things in terms of active versus passive investments and why they will look at Blackstone's new multi-billion infrastructure fund but prefer going direct in this asset class.

Update: Speaking of Blackstone, on Wednesday, CPPIB announced a partnership agreement with Blackstone, GIC and Thomson Reuters (TSX / NYSE: TRI) for Thomson Reuters’ Financial & Risk (F&R) business: 
Under the partnership agreement, the Blackstone-led consortium will own 55 percent of the equity in a new corporation created to hold the F&R business and Thomson Reuters will retain a 45 percent equity stake, at an overall valuation of US$20 billion

Thomson Reuters F&R is a world-leading data and financial technology platform that provides critical information and data analytics, enables financial transactions, and connects communities of trading, investment, financial and corporate professionals. It also provides leading regulatory and risk management solutions to help customers anticipate and manage risk and compliance.

Martin Brand, a Senior Managing Director at Blackstone, said: “We are excited to partner with Thomson Reuters – one of the most trusted companies in financial technology. The F&R division has tremendous assets, including a world-leading data business, essential risk and compliance solutions, OTC trading venues, wealth management software, and a strong desktop business. The partnership with Blackstone provides an opportunity to increase efficiency and accelerate revenue growth through innovation and focus on creating uniquely compelling products for F&R’s customers.”

Joe Baratta, Blackstone's Global Head of Private Equity, said: “We are delighted to partner with Thomson Reuters in continuing to grow the Financial and Risk business. This is a landmark transaction for Blackstone and our investment partners.”

Ryan Selwood, Managing Director & Head of Direct Private Equity, CPPIB, said: “This investment in F&R will broaden our portfolio in the growing financial technology space. We are very pleased to support the evolution of a global market leader.”

Choo Yong Cheen, Chief Investment Officer of Private Equity at GIC, said: “As a long-term value investor, we believe this business transformation will enable F&R to focus on its core customer base and be in a strong position to continue delivering innovative products to the market.”

Reuters News will continue to remain a part of Thomson Reuters and will not be included in the assets being acquired. The new F&R will enter into a 30-year contract for the exclusive rights to distribute Reuters News through all F&R products. Reuters News will continue to have complete editorial independence from F&R and Thomson Reuters, as it does today.
This is another great co-investment for CPPIB and GIC using Blackstone, a trusted partner that has delivered outstanding returns for both funds.