Canadian pension funds increasingly using co-investments to diversify real estate holdings

March 6, 2018

In their constant search for diversification, Canada’s largest pension funds seem to be continually restructuring their Canadian office building portfolios.

“The goal has been to redeploy their investments by expanding internationally and developing new class A office buildings in Canada as well,” says Ayres Gonsalves, vice-president of commercial at Dorsay Development Corp., a Toronto-based real estate development and investment company.

Large pension plans like the Ontario Municipal Employees Retirement System and the Ontario Teachers’ Pension Plan, through their respective real estate subsidiaries Oxford Properties Group and Cadillac Fairview Corp. Ltd., own a significant portion of the country’s class A office product.

“The majority of all new office buildings that have been constructed in the Toronto area over the last 10 years have nearly all been by pensions funds, including Oxford’s Richmond-Adelaide Centre and EY Tower, and Cadillac Fairview’s 16 York St.,” says Gonsalves.

A key part of the strategy has seen large pension funds selling a 50 per cent non-managing interest in some of their existing office holdings in major centres. “This gives the funds the ability to diversify outside of Canada without giving up control of Canadian assets,” says Steven Jeffery, a real estate lawyer at Blaney McMurtry LLP in Toronto.

The strategy is hardly a new one for the funds. “Co-investing with a small group of well-aligned joint venture partners has been an important part of Oxford’s business model for well over a decade,” says Claire McIntyre, vice-president of marketing and communications at Oxford Properties Group.

Examples include Oxford’s 2016 sale of a 50 per cent interest of office properties in Toronto and Calgary to the Canada Pension Plan Investment Board. At the time, the CPPIB and Oxford were already partners in a number of Canadian developments and holdings. The partnership goes back at least as far back as 2012, when the CPPIB bought a 50 per cent interest in two downtown Vancouver office towers — 401 West Georgia St. and 800 Burrard St. — from Oxford Properties.

For its part, Cadillac Fairview sold half its stake in its Vancouver real estate portfolio in 2017 to the Ontario Pension Board and the Workplace Safety and Insurance Board.

“This was a win-win for all parties,” says Gonsalves. “OPB and WSIB are growing pension funds who need to expand their Canadian content and this transaction allowed them to gain exposure to key properties that do not come on the market very often. At the same time, CF reduced its exposure to the Canadian real estate market and increased the cash available for new developments and international acquisitions.”

The deal continued Cadillac Fairview’s partnership with OPB, which included the 2015 sale of 30 per cent of the Toronto-Dominion Centre office complex and the 2012 sale of a 50 per cent non-managing interest in the RBC Centre at 155 Wellington St. in Toronto.

As it turns out, Canadian pension funds’ international office building investments have matured to the point where they are starting to become sellers in that arena too. In 2017, Oxford Properties and London, England-based REIT British Lands, which had developed 122 Leadenhall St. in London in 2014, sold the property to a Chinese firm for a record price.

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