The Canada Pension Plan Investment Board is extending its involvement in the Brazilian real estate market with a $343-million (U.S.) investment in joint partnerships to acquire two portfolios in the fast-growing South American country.On Monday I wrote a comment on how rising protectionism might stifle CPPIB's expansion in Asia, noting that "for all the talk of partnerships between sovereign wealth funds and Canadian pension funds, I haven't seen much action, just talk."
In the first joint venture, CPPIB said it has signed an agreement with Global Logistic Properties (GLP) and the Government of Singapore Investment Corp. (GIC) to acquire a portfolio of five development projects in Brazil. CPPIB will own a 39.6-per-cent interest while GLP and GIC will own 41.3 per cent and 19.1 per cent, respectively.
In the second joint venture, CPPIB will partner with GLP, GIC and the China Investment Corp. (CIC) for the acquisition of a portfolio of 35 logistic assets. CPPIB will own 11.6 per cent of the venture, GLP and CIC will each own 34.2 per cent and GIC will hold a 20 per cent interest.
CPIBB and other Canadian pension fund managers and real estate companies – notably the Caisse de dépôt et placement du Québec – have over the past several years been investing billions of dollars in Brazil real estate, where there is much room for growth and professional management of a fragmented real estate industry.
“Our real estate portfolio in Brazil now includes interests in 56 retail, office and logistics properties including assets currently under development, which, when completed, will total more than 35 million square feet of leasable area,” Peter Ballon, head of CPPIB’s real estate investments for the Americas, said in a news release Wednesday.
“We look forward to partnering once again alongside GLP, a well-aligned partner and one of the largest global logistics owners and developers in the world.”
The first portfolio – known as the Development Joint Venture – consists of five development sites with total gross leasable area of over 8 million square feet. Most of the sites are in the state of Sao Paulo, near key industrial and logistic hubs with direct access to transportation nodes, CPPIB said.
The second portfolio – the Stabilized Joint Venture – is made up of 34 fully leased assets primarily located in the southeast region of Brazil and one strategically located development site. The portfolio has a total gross leasable area of over 13.7 million square feet with a diverse tenant profile, said the fund.
The deal for the two joint ventures is set to close next month.
CPPIB is the management firm that invests money for the Canada Pension Plan on behalf of 18 million Canadians. Its portfolios include public and private equity, real estate, infrastructure and fixed income instruments.
At Sept. 30, 2012, the CPP Fund had $170.1-billion (Canadian) under management, of which $18-billion is in real estate investments.
I was obviously wrong as these joint ventures prove there is a great deal of dialogue between sovereign wealth funds and Canadian pension funds and they are interested in working together on large global transactions. And for all the talk of protectionism, one major Canadian pension plan is betting that the Nexen deal will go through, significantly increasing its stake in that company (just like Paulson).
Will CPPIB's strategic alliance with Singapore's GIC and China's CIC help its expansion plans into Asia? You bet it will, which is why you will see many more deals like this in the future, and not just between CPPIB and Asian sovereign wealth funds (SWFs), but with other large Canadian pension funds too. Without these alliances, Canadian pension funds cannot compete in Asia.
For their part, GIC and CIC are partnering up with pension funds that have the expertise and network to sift through deals in the Americas and Europe. And there will be plenty of buying opportunities in global real estate as entities like Blackstone look to sell their property holdings:
Blackstone Group (BX) expects to increase sales of its property holdings in the next year, with potential buyers including real estate investment trusts and sovereign wealth funds, said Jonathan Gray, the firm’s global head of real estate.
Blackstone this year finished raising $13.3 billion for the largest-ever private-equity real estate fund. The company, based in New York, is moving to sell investments from prior funds as it invests its new pool.
“We think the pace of realizations for us will pick up in 2013 and 2014 in our real estate portfolio,” Gray said today at the Bloomberg Commercial Real Estate Conference in New York.
Blackstone is seeking as much as 800 million pounds ($1.27 billion) for Chiswick Park, a west London office development it bought in April 2011 for 480 million pounds. The firm is the second-largest U.S. office landlord through its Equity Office unit, with buildings in markets including San Francisco, Los Angeles, Boston and New York. Its other real estate holdings include shopping centers held through its Brixmor unit, and the Hilton Worldwide Inc. hotel chain.
Blackstone seeks to buy assets at discounts, often during periods of distress, and invest money to improve the properties before finding new buyers. The company may sell some holdings that have stabilized amid increases in occupancy, Gray said.
Occupancy across Blackstone’s office buildings has climbed to almost 90 percent from about 80 percent to 81 percent, according to Gray. As occupancy rises to the low- to mid-90 percent range, “we could take it public or sell to a range of institutional investors,” he said.
Well-run REITs are able to borrow in the bond market at low costs, which will aid them in making more deals, Gray said.
“The other trend that will be helpful for us to exit some of the larger things we own, particularly the higher-quality assets in the gateway cities, is the rise of the sovereign wealth fund,” he said. “Sovereign wealth funds are enormous pools of capital around the world” and real estate offers higher yields than government bonds, along with a hedge against inflation, he said.
Blackstone still intends to take Hilton public in the next year or two, Gray said. The company acquired Hilton, the world’s biggest hotel operator, in 2007.
Logical ExitWhen it comes to global real estate, you have to track the big boys, but be warned, commercial property faces risk on yields:
Hilton President and Chief Executive Officer Christopher Nassetta “has been doing a terrific job,” expanding hotel room count, Gray said. Construction of hotel rooms outside the U.S. has risen about ten-fold, and revenue per available room has increased, he said.
“We’re just sort of getting to the point where we feel like the asset’s going to get appropriately valued,” Gray said. “Over the next year or two we’ll look to probably take a company like Hilton public. That’s the most logical exit, given its size. But we don’t really have any pressure and the business itself is performing quite well.”
Europe also offers opportunity for real estate investment, as banks there sell assets to reduce debt, Gray said. Blackstone also has been buying office buildings in India as other investors flee that market, he said.
Rising risks, including an eventual increase in interest rates, are leading commercial-property investors to borrow less and expect lower returns, said real estate executives including Rob Speyer and Richard J. Mack.
AREA Property Partners LP isn’t building U.S. offices without signed tenants, even as commercial values increase, Mack, chief executive officer for North America, said at the Bloomberg Commercial Real Estate Conference today in New York. Tishman Speyer Properties LP has used “average leverage” of less than 50 percent in deals since 2010, said Speyer, the New York-based office developer’s co-chief executive officer.
“Our investors are less interested than you might think in taking advantage of all the money they can borrow, and more interested in investing their cash,” Speyer said. The company is trying to provide them a “margin of safety,” rather than high-risk strategies with potentially greater upside, he said. “We know not everything goes as you plan.”
Real estate in the U.S. has benefited from the Federal Reserve’s policy of keeping its benchmark interest rate near zero, with investors drawn to assets such as well-located and leased offices, hotels and apartment buildings that beat yields on Treasury bonds. Sales of commercial property nationwide rose 19 percent in the third quarter from a year earlier to $67 billion, according to research firm Real Capital Analytics Inc.
Commercial-property prices have been driven up by the low rates, which in past market cycles have inflated values that at some point fall, Robert Knakal, chairman of New York-based Massey Knakal Realty Services, said during a separate panel discussion.
“Periods of low interest rates for long periods of time create asset bubbles,” he said.
Low rates may be propping up values in New York, where there’s also a reduced inventory of property for sale, said Richard LeFrak, chairman and CEO of LeFrak Organization.
“It’s the gorilla in the room,” said LeFrak, whose family has built hundreds of residential properties in the New York area. “We have been living in a world of low interest rates.”
Opportunistic investors such as Cerberus Real Estate Capital Management LLC are avoiding lower-yielding markets such as so-called gateway cities like San Francisco and Washington, focusing instead on Europe, which is “two to three years behind” the U.S. recovery, Ronald Kravit, managing principal of the New York-based firm, said at today’s conference. The U.K., Germany, Ireland and Spain have the best legal systems for resolution, and plenty of real estate distress, he said.
‘Very Careful’Exactly, choose your spots carefully, avoid the herd mentality and make sure your partners have a strong operating capability. You should also pay attention to these top seven emerging trends in real estate.
“We’re not particularly interested in returns of 10 to 14 percent,” Kravit said. Still, investors need to be “very careful” in their quest for cash flow even as debt-laden building owners dispose of properties around the globe, he said.
In the U.S., secondary markets outside gateway cities are drawing investors to lower-priced buildings whose rents are rising, Michael Boxer, a partner at Cowen Group’s Ramius unit, said during a separate panel discussion.
Pittsburgh has office vacancies of less than 10 percent, Houston’s energy sector makes it a “prolific” market and San Diego has a favorable “risk-reward ratio,” said Ralph Rosenberg, head of real estate at New York-based private-equity firm KKR & Co.
Still, potential pitfalls exist in secondary markets, Boxer said. Even New York, considered a safe investment location for global capital, has “political risk” after two mayoral administrations that were “business-friendly,” Speyer said.
“You’ve got to really choose your spots and, in my opinion, you have to have a strong operating capability,” Boxer said.
As for CPPIB's latest foray into Brazilian real estate, this just confirms that they're still buying Brazil's boom. But you have to wonder why Sao Paulo-based Hemisferio Sul Investimentos (HSI), a real-estate private equity firm, agreed to sell its logistic and industrial assets to Singapore-based Global Logistic Properties Ltd. (GLP) at this time. Maybe they know something their buyers don't and seized on the opportunity to unload these assets before the World Cup and Olympics.
I'm not saying this is a bad deal as I firmly believe not just in Brazil but South America's long-term growth prospects. CPPIB, the Caisse and others obviously aren't buying these assets for opportunistic reasons, they're thinking about long-term returns. But there are risks in these large real estate transactions and there will be more backlash in Canada, even though this is misplaced.
Below, Al-Jazeera reports on how authorities are cleaning up Rio de Janeiro's drug-riddled favelas in preparation for 2014 Soccer World Cup and 2016 Olympics. The crackdown seems to be working but as you can see, huge obstacles remain in Brazil, chief among them is gross income inequality, poverty and crime.