Canadian pension fund Cadillac Fairview’s emergence as the favourite bidder for the 17-acre White City Place campus in west London this month was a reminder of the mark that Canadian investment has made on London’s property market in recent years.
Investment into London from Canadian buyers ramped up last year, hitting a total of £1.12bn – a near-14% increase on 2018 and up 131% from 2017, according to data from CBRE.
This year has already been busy. The Canadian Pension Plan Investment Board has agreed to plough a further £40m into the next phase of its Elephant & Castle scheme with Lendlease. Brookfield has entered talks over acquiring 20 Churchill Place in Canary Wharf, E14, while also weighing up a sale of 1 London Wall Place, EC2, only months after buying it from fellow Canadian investor Oxford Properties.
“We have noticed that our counterparts have picked up their investment pace,” says Jay Kwan, head of Europe at Vancouver-headquartered QuadReal Property Group.
Chris Brett, head of EMEA capital markets at CBRE, says: “The Canadian market is not able to absorb all the money from the Canadian pension funds, so global diversification is paramount. Particularly with the mandatory savings policy the Canadian system has, their inflows of capital are enormous and the UK and Europe offer the long-term stability they look for.”
Brexit uncertainty last year meant international interest in the UK diminished, in particular from Asia, says Ryan Prince, London-based managing director at Realstar. That gave Canadian buyers scope to swoop on assets.
“That market uncertainty created windows of things to do,” Prince adds. “But as soon as the election happened, in some ways, it released pressure on other people and they started to come into the market – and it got a little bit harder to do deals.”
Now, the spread of coronavirus is presenting real estate professionals with a challenge the likes of which few have faced before. But with long-term investment horizons, Canada’s property firms are unlikely to turn their backs on the UK any time soon.
Alternative investments
More than £500m of Canadian investment in London last year went into residential assets. Recent deals suggest the trend will continue this year – in London and beyond. QuadReal Property Group has launched a €1.25bn (£1.1bn) joint venture with Hines targeting build-to-rent, student housing and serviced apartments outside of the capital and Europe and purchased a 294-home scheme in Ilford with Realstar in February.
“We are not unique in identifying some of the trends that we think are compelling, such as the shift towards renting, partially driven by affordability,” Kwan says. “We look at the supply and demand dynamics and we are fairly convinced that in the foreseeable future that shortage is not going away in most European cities. London alone has a fairly significant gap between what they think they need per annum and what they are actually getting.”
He added: “Given that we are really late in the cycle, we ask ourselves which sectors may have reasons for outsized returns beyond just market movements.”
Tom Jackson, managing director for real estate investments at CPP Investments, describes pension fund CPPIB as “very positive” about the outlook for student housing investment in the UK.
“We sold our Liberty Living platform to Unite but we also rolled a significant amount of our equity into the combined platform and now have a 20% stake in Unite,” he says.
Jackson adds that the pension fund, which already owns a 50% stake in Milton Park, a science and business park in Oxfordshire, is also actively targeting the life sciences sector. “There is a relative shortage for the life sciences sector, which is showing growth in the UK in particular. We definitely have an appetite to do more there,” he says.
In addition, CPPIB is still funding speculative development in the logistics sector, which Jackson says still shows “key structural tailwinds”.
CPPIB has around C$17.9bn (£10.7bn) invested in real assets in Europe. In terms of equity, the pension fund is at about C$8bn in capital value, or £5bn in carrying value.
Other investors are eyeing more traditional asset classes, with more than £400m of Canadian deal flow going into office investment in London last year. Brookfield, for one, has refocused on offices in the capital.
“We have taken the view that London, from a fundamental point of view, has been performing very well through some challenging times,” says Zach Vaughan, managing partner and head of Europe for real estate at Brookfield.
“When the capital transaction side slowed significantly, the fundamentals, in terms of leasing and financing, did not. So we decided that if there are opportunities to expand we should take advantage of that.
“It just felt like London had been overlooked, so we were trying to do as much as we could.”
Covid-19 and after
Executives speaking with EG are now exploring ways to grow their businesses, including entry into new markets.
Several Canadian investors, including CPPIB and QuadReal, would consider buying operational platforms as a way of expanding. Kwan says QuadReal is assessing a few such deals currently. Jackson cautions, however, that operating platforms can come with additional risk and operational burden, so says CPPIB will be highly selective.
Brookfield would also look at buying other operational platforms it could build up into integrated property companies, but Vaughan warns that “buying a business isn’t without its challenges”. “I always tell the team that ‘properties don’t phone me on the weekend to complain about other properties’” he says.
The company will make longer-dated core plus assets a key focus, Vaughan says. “These are generally properties that have longer-dated business plans but will need some repositioning and capex reinvestment down the road. As low as yields are, the implied risk premium for private commercial real estate in Europe is still attractive.”
The business will also keep building its student housing, serviced-apartment and micro-living businesses throughout Europe.
The coronavirus outbreak is expected to impact the real estate sector significantly for many months, and the outlook is as difficult to predict as many dealmakers will have known it. But executives speaking with EG are doing their best to plan beyond the pandemic.
“Markets are really good at looking forwards and once they can look forwards and say this is going to open in three months or six months then I think you will see capital start to flow back into the market,” says Realstar’s Prince. “Until then, you might start to see some more distressed situations. But every day feels like a new year at the moment.
“Until we get past the cycle where each and every day something dramatic is going on you are not going to see a huge amount of transaction activity.”
In addition, he speculates that: “For the first time, in a long time, we may find that you have more investment universe than there is capital to do deals.
“For the last 10-15 years people have said that there is more money than deals to do out there and I think we are going to be on path to a reversal of that.”
Nonetheless, many Canadian investors are considering how to grow their UK and European holdings, with the majority who spoke with EG planning to invest more this year and next. QuadReal is weighing up a move into Europe’s debt market, for example. “It’s too early at the moment, but it is certainly something we think about because we are actively lending in Canada and the US,” Kwan says.
He adds: “In the absence of coronavirus I would have expected a significant uptick in activity in the UK from Canadian investors. It will be a good three to six months at the very least of slow economic activity, with bankruptcies, more CVAs, and unemployment may shoot up.
“But we are trying to cautiously invest additional capital and we still have fairly ambitious plans. We are long-term investors and will be looking for opportunities once there has been more clarity on the current pandemic.”
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