Andrea Orlandi is something of a wolf in sheep’s clothing. Or perhaps more fairly described, a private equity investor dressed up as a pension fund manager.
The head of real estate investment for Europe at Canada Pension Plan Investment Board clearly has the attitude of a man targeting high yielding returns, driven by his background as European chief investment officer at Area Property Partners, now Ares. Just because he works for a $298.1bn (£177.4bn) pension fund looking after the savings of 19m Canadians he does not take a passive view on investing.
“I remember when I joined, five-and-a-half years ago now, the view was I wasn’t joining a competitor. That was interesting. I didn’t necessarily see it that same way because I could see where CPP wanted to go,” he says.
What are Canada Pension Plan and Canada Pension Plan Investment Board?
Canada Pension Plan is a pension system which is compulsory for almost all of those of working age in the country, to pay into. On earnings between C$3,500 (£2,086) and C$54,900 (£32,680), a 9.9% contribution is made which is split equally between worker and employer.
Canada Pension Plan Investment Board was founded in 1997 to oversee CPP’s funds not used to pay pensions. Its sole mandate is to achieve a “maximum rate of return, without undue risk of loss” and requires a real rate of return of 3.9% in order to sustain the plan at its current contribution rate. It does so by investing in private equity, public companies and real estate. (The real estate segment targets unleveraged returns of around 6% and leveraged returns of around 8-10% due to its higher risk profile).
Although acting in much the same way, strictly speaking, CPPIB is not a sovereign wealth fund as it reports to an independent board of directors unrelated to CPP and is at arm’s length from government.
CPPIB may only be targeting annual unleveraged returns of around 6% or leveraged returns of 8-10% from its real estate investments compared to the heady 15%-20% leveraged returns typically shot for by firms such as Ares, but it is this thinking that is shaping the way it is doing business in the sector.
Not afraid of taking a profit quickly, getting stuck into development and buying platforms, CPPIB is no sleepy investor looking to park capital. It now has a team of 80 property specialists globally, a quarter of which sit in Portman Square, W1.
“It is harder to generate good returns over a 10-year period than a shorter period,” Orlandi quips with a wry smile.
CPPIB is one of a number of giant pension fund or sovereign investors that has become increasingly proactive in its strategy since it first started making a play for European real estate in 2008. Many such investors or limited partners would have historically invested with third party fund managers or general partners, now they are now increasingly turning their backs on dishing out such mandates and have become more independent as they become more confident and experienced.
Broadly, this is bad news for managers of co-mingled funds or separate account mandates and good news for experienced joint venture and operating partners that can provide specialist skills and insight with which the likes of CPPIB can do repeat business.
In order to outperform the market, Orlandi is looking to team up with partners to buy in large lot sizes where competition is less, unearth major regeneration projects to back and continue to invest in uber prime shopping centres and student housing.
Only around 10% of CPPIB’s European real estate portfolio is now through indirect investments. All of these were made prior to Orlandi joining in 2011 and are predominantly in Blackstone and Prologis funds.
CPPIB IN NUMBERS
When looking for partners CPPIB looks for “alignment of interest”, not necessarily looking for exactly matching capital but proportionate skin in the game. That though is not enough on its own and partners must be happy to fall in with the fund’s scrupulous nature.
“So much is about the people. We meet a lot of people who are very good, very professional, best in class, but we suspect we’re not going to work well together. Are they used to quarterly meetings? Are they used to sharing the decision making? Our existing partners have learned to appreciate us and what we bring to the table.”
This forensic attitude propels Orlandi and his team to constantly question whether it ought to be holding on to assets and not just holding properties in order to take an income coupon.
“Very often, people will buy an asset and they just, sort of, sit on it and just collect rent, or they just look at the income. In many cases, the assets are depreciating over time,” he says.
Reflective of this mantra, over the course of 2015 and 2016, CPPIB took the opportunity to sell out of some of its more mature central London office assets it owned with Hermes, such as 100 New Oxford Street, W1 and 138 Cheapside, EC2.
It moved aggressively into development or refurbishment projects where it was looking to move up the risk curve as the cycle advanced, most notably Nova in Victoria with Land Securities and the South Bank Tower, again alongside Hermes. As central London assets repriced, it also bought into the regional UK office markets such as in Leeds, where it owns 50% of the 1.5m sq ft Wellington Place project with Hermes.
“If you want to generate alpha returns or outperform, you need to be a bit ahead of the market,” Orlandi says.
Undertaking development not only gives potentially greater returns than buying mature assets but when done on a large scale can provide a pipeline of opportunities to deploy capital. For this reason CPPIB would like to get involved with more traditional regeneration projects.
“I’d say, when I look at our development portfolio compared to other regions across the globe, we’re generally light,” says Orlandi. “The only large development really is Nova, where we have practical completion and others are generally derisked. We can take a ten year view on an area and what a building will look like then, unlike private equity.”
JEWELS IN CPPIB’S EUROPEAN REAL ESTATE CROWN
Westfield Stratford City25% stake in 1.9m sq ft shopping centre alongside Westfield and APG |
Paradise Circus, Birmingham50% stake in 1.8m sq ft office-led development project alongside Hermes |
|
Nova Victoria50% stake in 897,000 sq ft office project alongside Land Securities |
Liberty Living£1.9bn UK student platform |
Centro Oberhausen50% stake in 1.6m sq ft German shopping centre near Düsseldorf alongside Unibail Rodamco |
Puerto Venecia50% stake in 1.3m sq ft shopping centre alongside intu |
Grand Central, Birmingham50% stake in 435,000 sq ft shopping centre alongside Hammerson |
|
Although zealous two or three years ago, it seems Orlandi is taking a more cautious approach over making more office investments either in London or the regions.
“We are still looking at the regions,” he says. “We are constantly careful in underwriting where we expect the rents to be over time. Regional rents don’t move around a whole lot and ultimately you need strong economic growth to drive occupancy.
“I think we’re probably in a bit of a transition right now in London because I do think it’s slowed down, and so with our partners, I think it’s really waiting to see, as the opportunities arise. Prime assets are being seen as an alternative to a fixed income investment, driving premium prices. Ultimately, if you’re going to do development you need to lease it and you need economic growth, you need companies to expand. We’re monitoring it but I’m not sure the fundamentals are there yet.”
CPPIB is probably best known in Europe for being an owner of prime shopping centres and around 60% of its portfolio is within the retail sector. As well as providing opportunities to deploy large amounts of capital in one go, the fund has also been able to build up a knowledge base in the sector that makes it more confident in marking investments.
“One reason is scalability, and their complexity compared to offices means it’s a little less competitive when we look to buy assets, plus there are barriers to entry in building a new shopping mall. We gravitate towards the capital and rental growth given our long-term profile as an investor.
“Of course, all information is treated privately and confidentially, but given we work with intu, Unibail, Westfield, Hammerson, we are often actually seeing more than they do because we’re seeing it across different regions and types of assets,” says Orlandi.
The fund is increasingly gravitating towards prime or fortress malls with strong leisure influences, which it hopes will be less negatively impacted by online trends.
“When I joined we had interests in over 20 shopping malls in the UK. Today we have four. We have found across the portfolio, regional dominant centres continue to outperform. It doesn’t mean the smaller centres are bad investments but it’s harder to get capital growth.
“If you are looking for an income return and have good management it’s fine, but you are seeing the impact whether it’s the demographics or the urbanisation or ecommerce, that buyers are gravitating towards those centres.”
Typically CPPIB joint ventures with specialist partners but its largest investment in European real estate came in 2015 when it bought student accommodation Liberty Living outright for £1.1bn and took on the management team in order to acquire expertise in the sector. It has since bought two further portfolios totalling almost £800m.
“Running a company like that is a full-time business and you really need to manage the senior management. We went in eyes wide open and we have really focused on it. But it does give you quite a lot of benefits and when portfolio has come along we have been able to bid on our own.”
Some concerns of oversupply in the UK student market has mildly dampened the once red hot sector but Orlandi is not deterred.
“The fundamentals are still very strong. Yes, there are certain pockets where you have to be careful. Growth for us will come more organically. One of the initiatives from within the Liberty platform is to increase the capability of development. And we’ve started looking at student housing also on the continent. I don’t think it would necessarily be part of the Liberty platform though.”
The Canadian fund has been relatively unadventurous in terms of its geographical reach in Europe and has concentrated largely on the UK, teaming up to buy shopping centres with intu in Spain, with Unibail Rodamco in Germany and Citycon in the Nordics. It looks like this is unlikely to change.
“We try to focus on where we believe there’s growth and where there’s long-term value when we invest, and also by our partners. Two of the constraints we have from an operational point of view are scalability and a market. When the fund is so large and resources are limited we look for markets where we can grow and can invest sufficient capital to justify it.”
CPPIB may be treading cautiously in the London market for the time being but it is ready to make big bets for the right opportunities. For the partners that can bring skills to the table to benefit the fund, there could be major opportunities to sink their teeth into, and with Orlandi’s private equity mind-set there could be plentiful returns to enjoy too.
To send feedback, e-mail david.hatcher@egi.co.uk or tweet @hatcherdavid or @estatesgazette
