Investor Universe: Canada

When Canadian pension funds have cash on hand, they behave a lot like us – they take a trip to the shopping mall. Christopher O’Dea reports 

Canadian institutions, led by the country’s large public-sector employee pension funds, are big investors around globe, and have long been innovators in financing most forms of infrastructure, and core property such as office and multifamily in major markets. 

Interest in those sectors continues, but big Canadian pension funds have acquired a taste for retail property, and they have a big appetite for shopping venues at home and abroad.

Canadian institutions buy and develop everything across the sector. High-end shopping centres in urban and near-city locations have long been a staple. Now, some are moving into regional malls and even looking at outlet malls. 

While Canadian pension funds have acquired some premium assets in Europe during the past several years, some have also headed back home to finance some of the largest shopping centres ever. 

The expansion of the target list beyond the top-tier shopping centres reflects the evolution of retailing, much of it driven by the disruption of traditional department store business models by ecommerce. These changes are creating new ways for retailers and brands to showcase and deliver their wares to consumers. But one thing remains the same – the need for long-term stable income streams to match liabilities.

This has made shopping malls of all types a go-to asset. “Retail property is our largest sector exposure” in Europe, says Andrea Orlandi, managing director and head of real estate investments for Europe at the Canadian Pension Plan Investment Board (CPPIB). With net assets of C$273bn as of September 2015, CPPIB is Canada’s largest single-purpose pension fund. Retail property comprises about 60% of the assets invested Europe, Orlandi says. “We like the profile of retail as a total-return type of asset which matches our liability structure,” he says.

Among key holdings are a 50% interest in CentrO Oberhausen, a super-regional shopping centre north of Düsseldorf in Germany. CPPIB says the centre, built in 1996, is one of the largest and most successful retail developments ever undertaken in Germany. To grow its German retail property platform, CPPIB also acquired a 46.1% interest in mfi management fur immobilien AG, the German retail unit of Unibail-Rodamco, the second-largest retail REIT in the world and the largest in Europe.

The UK is similarly attractive for CPPIB. In London, it holds a 25% interest in Westfield Stratford City, the largest shopping centre in Europe. It is located adjacent to the site of the 2012 London Olympics and encompasses 350 shops, over 70 restaurants and bars, and a cinema. Alongside Hammerson, CPPIB also has interests in Bullring in Birmingham and Silverburn In Glasgow.

While retail property now occupies a significant slice of the fund’s assets, that weighting did not result from a top-down allocation mandate or an investment strategy initiative requiring retail acquisitions, says Orlandi. CPPIB manages assets not immediately required to pay benefits, and does not make allocations to particular sectors. “We’re not investing a fixed percentage of the fund,” he says. “It’s more a function of where we see opportunity in the market.”

In the retail sector, for example, while shopping centres have some exposure to overall economic conditions in a country or region, “our view is not to trade assets, we hold for the long term”. Orlandi says. “So it’s a matter of the entry point and how we are managing and valuing the asset.”

In late-2013, for example, Spain was still in a recession, but CPPIB felt the economy was improving and it acquired shopping centre assets there. Ultimately, the success of a shopping venue depends on whether local business conditions are robust enough to generate what every retailer needs – “strong footfalls and steady sales”, as Orlandi puts it.

A careful eye for strategic entry points is essential for success when investing in retail property, says Sal Iacono, executive vice-president of investments at Cadillac Fairview, the wholly-owned subsidiary for property investing of the C$155bn Ontario Teachers’ Pension Plan. The company says its portfolio is worth US$29bn.

Retail property comprises the bulk of Cadillac Fairview’s portfolio – specifically, super-regional shopping centres. It is the type of asset that appeals to a long-term investor like Cadillac Fairview. For one thing, owning 20 of the best shopping centres in Canada allows Cadillac Fairview to benefit from “higher sales and better rents”, says Iacono. And because they’re located in economically strong locations, such assets are rarely available. “Super-regional centres just don’t trade very often,” Iacono says. 

Cadillac Fairview says it operates seven of the top 10 best-performing malls in Canada, and its shopping centres typically generate sales about 30% higher than the International Council of Shopping Centers’ average for Canadian centres. That economic strength translates into high asset values. “For a really high-quality retail property that has a quite certain growth profile based on sales trends, the cap rate will be at or slightly lower than the cap rate for a high-quality office property,” Iacono says. 

That said, Cadillac Fairview cannot charge higher rents without delivering value for tenants, Iacono says. In fact, owning retail property is becoming as competitive as retailing itself. To maintain its leadership position, the company last year launched a branding programme, adding a ‘CF’ logo to the names of its 20 shopping centres in Canada. It is part of the firm’s effort to “make the great even better in an omni-channel world,” says Iacono.

To help become a leading consumer brand in its own right, Cadillac Fairview has launched a CF SHOP! card supported by a smartphone app that enables consumers to combine gift card balances under the Cadillac Fairview moniker. And to keep digitally-driven shoppers happy, many Cadillac Fairview properties now offer text-based concierge services, free wifi access and mobile charging stations. “We want to make sure the choice of the retailer of the future is to be in our property,” he says.

Building stronger ties to consumers could prove to be a savvy move because retailers will soon have more choices of where to locate in Canada. Pension funds and public agencies are investing in several massive new developments that include retail space in the greater Montreal area. To the city’s west, in Brossard, private developer Devimco Real Estate is leading a $1bn project including 2,000 residential units, retail and office space. The Caisse de dépôt et placement du Québec, parent of Ivanhoe Cambridge, is considering investing in a light-rail line linking Brossard to Montreal-Trudeau Airport.

In Laval, the city immediately north of Montreal, a consortium is planning a $420m development, Espace Montmorency, comprising 10 buildings with shops, restaurants, entertainment venues and offices. Montreal media have dubbed the project “the mother of all malls”.

Ivanhoé Cambridge CEO Daniel Fournier told the Canadian Club of Montreal that the company is looking to open an outlet mall in the Montreal area. It has been reducing its retail property holdings, selling off more than C$3bn in secondary and tertiary assets to concentrate on outlet centres and super-regional shopping centres. Fournier said the shift is part of a transformation begun five years ago to run Canada’s top shopping centre and office buildings, increase investment in the US and Europe, and increase investments in multifamily residential.

Ivanhoé Cambridge’s strategy may soon confront the Québec fund’s property unit with a new challenge – how to compete for rare retail assets against a rival investor that is a digitally-savvy consumer brand.

“New technology and the rise of the sharing economy will continue to shape the retail market in 2016,” CBRE says. “Brands will attempt to deliver an overall lifestyle to the Millennial shopper. Online and in person, retailers will appeal to the consumer’s mind, body, and soul.”

However the investment landscape shapes up, “the shopping mall has long been at the centre of the Canadian retail market”, CBRE says. That will be underscored in 2016; CBRE expects high-end retailers to gravitate away from traditional high street sites, towards the increased luxury of super-regional shopping centres.