Canada is amongst the world's most politically stable countries and for sure, one of the strongest banking systems in the world, albeit a small territory in terms of populace.     Real estate in Canada is characterized by concentrated ownership by the largest institutions in the country and as a result, opportunities are difficult to come by.   By the same logic,  the lack of available opportunities also provide capital appreciation.  

As a result of the Subprime issues, though some ripples are being by some of the institutional owners as evidenced by the following.

• Canada's largest Pension Fund Manager loses C$5.7 billion on real estate

Bruised insurers put acquisitions on hold   
Attention shifts to maintaining, strengthening capital positions as their investments in markets take beating

Canada's biggest life insurers are scaling back takeover plans after an ugly quarter that saw their investments hammered.

The big three players in life insurance are still weighing acquisitions, but executives at Manulife Financial Corp., Sun Life Financial Inc. and Great-West Lifeco Inc. are more focused on hunkering down and preserving capital in the wake of fourth-quarter results.

"We are going through some extraordinarily difficult times," said Manulife chief executive officer Dominic D'Alessandro. "We've not seen markets behave like this in 100 years."

The insurers are focusing on their financial cushions and preparing for any trouble on the horizon.

"The theme for our whole industry is to build and maintain a strong capital position," said Sun Life chief executive officer Donald Stewart. Sun Life sees "considerable opportunities for acquisitions," and the price of deals has fallen, but the overall mood is cautious in the wake an unprecedented swoon in debt and equity markets, Mr. Stewart said.

Like Sun Life, Manulife is in the midst of exploring a few specific takeover opportunities. Both firms are expected to bid on small units of American International Group Inc., but not AIG's Asian crown jewels, which they coveted in the past. "It doesn't mean we're still not interested, but our primary focus is on maintaining our capital levels close to where they are," Mr. D'Alessandro said.

"And if we were to undertake M&A activity, it would be financed with capital appropriate not to weaken our overall position," Mr. D'Alessandro added.

As stock markets plunged by more than 20 per cent in the last three months of 2008, Manulife lost $1.87-billion. Sun Life lost $696-million, if a big gain from the sale of its stake in CI Financial Income Fund is factored out, although its final profit came in at $129-million in the quarter. Winnipeg-based Great-West Life lost $907-million after writing down the value of Putnam Investments, the U.S. investment business it bought in 2007, by $1.35-billion.

"Clearly we've got some tough slugging ahead and it's better to be safe than sorry and we're going to look at ways to bolster our capital," Mr. D'Alessandro said in an interview.

"I hope that at some point we'll be able to report to you that the tide has turned, and we're regaining or we're stopping the bleeding at least, and the strength of the franchise and our businesses will become apparent to you once again," Mr. D'Alessandro, who is scheduled to retire in May, told analysts on a conference call.

"Our facts are that our contracts are under water by about $26-billion," he said of Manulife's troubled variable annuity and segregated funds business.

Plunging stock markets have caused a shortfall in the amount of money the insurer has invested for payments that are due to be made to customers decades from now.

As a result, it is having to sock away billions of dollars, although it can release the reserves in the future if markets improve.

The situation overshadowed Manulife's underlying operating results, which executives say are among the best ever.

"Virtually every other measure of our operating success would indicate that this is one of our best years, but for that theoretical charge associated with the market," Manulife chief investment officer Don Guloien, who will succeed Mr. D'Alessandro in May, said in an interview.

"We've written a hell of a lot of profitable new business," Mr. D'Alessandro said.

During a conference call with analysts, Mr. Stewart faced criticism of the insurer's risk management skills, and the dependability of its dividend. His response was to point to Sun Life's strong balance sheet and explain: "While the dollar values [of the losses] are large, so too is the magnitude of the economic events we have experienced."

Great-West chief executive officer Allen Loney said that despite the writedown on Putnam, the company plans to keep expanding its U.S. wealth management division, but growth in that sector will likely slow.

"Our core continuing operations performed well, especially considering the global economic environment," Mr. Loney said.

***

Manulife

Source: Company reports

Sun Life

Source: Company reports

Great-West Life

Source: Company reports

***

MANULIFE (MFC)

Close: $18.20, down $1.16

SUN LIFE (SLF)

Close: $23.15, up 15¢

GREAT-WEST LIFECO (GWO)

Close: $18.20, down 35¢

- 2009 February 13    GLOBE & MAIL

Real Estate funds frozen

London Life Insurance Co., an arm of Great-West, said that investors won't be able to redeem their investments in the $1.56-billion London Life Real Estate Fund because it's impossible to sell buildings fast enough to meet requests. The Great-West Life Real Estate Fund, with almost $3.16-billion in assets, was also frozen.

With markets in disarray, investors are pulling money out of almost every asset class, but are finding that with real estate, whether in fund or concrete form, it isn't always possible to get out quickly. London Life's move follows a similar freeze on Friday by UBS AG, which said clients could no longer get at their holdings in a $6-billion (U.S.) property fund.

While the moves no doubt leave some investors dismayed, they are unavoidable and help preserve value by avoiding fire sales of the buildings owned by the funds, said Dan Hallett, who runs an investment research firm.

"If it comes to a point where you've got so many redemptions, you really do want them to freeze redemptions," Mr. Hallett said. "Do you want to be in a position when it's a forced sale of assets? Probably not. It's probably the best step to take."

Putting assets that are hard to sell, such as commercial real estate, into a mutual fund structure creates the potential for such freezes, and that's one reason that there are only a handful of such funds in Canada, Mr. Hallett said.

During the last big real estate downturn, in the early 1990s, some funds converted to real estate investment trusts to eliminate the problem, he said. Because REITs are publicly traded, an investor who wants money back can sell units to another investor, meaning a REIT doesn't have to sell assets to fund redemptions.

"It really boggles my mind why you'd put such an illiquid asset in such a liquid structure," he said. "It's really a mismatch. "

Both the London Life and Great-West funds invest in all types of real estate, but most of their assets are office buildings.

The commercial real estate market in Canada has held up well so far, compared with other markets in the world, but with new buildings under construction as the economy slows, many in the industry expect building prices to slump and rents to soften.   -  2008 December 16   GLOBE & MAIL

GREAT WEST LIFE FREEZES REDEMPTIONS FROM REAL ESTATE FUNDS

GREAT-WEST LIFECO INC. became the latest money manager to freeze redemptions from mutual funds that invest in buildings. LONDON LIFE INSURANCE CO., an arm of Great-West, announced that investors will not be able to redeem their investments in the $1.56-billion London Life Real Estate Fund. The reason given was that it has become impossible to sell buildings fast enough to meet requests. The Great-West Life Real Estate Fund, with almost $3.16-billion in assets, was also frozen. Both the London Life and Great-West funds invest in all types of real estate, but most of their assets are office buildings.   - 2008 December 19   MARKET MATTERS.com

HISTORICAL
During the past few decades, the large institutions utilized the opportunity of downturn in the global economy to consolidate their dominant positions in major cities in the country as they have been restricted to investing in Canada, until recently.

Canadian Investment Property Overview

The Canadian property scene is characterized by barriers to entry due to the concentration of ownership by Canadian institutions who are limited to investing in Canada.  As a result real estate values in the country are considered amongst the world's most stable and safe.  These barriers to entry ensure continued appreciation for investments in prime Canadian real estate.

Institutions own the majority of the country's best shopping centres and office towers in Toronto, Montreal, Vancouver and Calgary. 

They are just starting to venture outside of Canada with their investments and trail global fundmanagers who have been scouring the marketplace for 'deals'.   As a result we expect more Canadian institutions to be taking a piece of their American or international counter parts dues.   We see this with CPP's recent buy-in into Morgan Stanley's purchase of Blackstone's purchase of the Sam Zell's Equity Office portfolio in the US. 

CPP Investment Board dips toe into U.S. real estate market

The Canada Pension Plan Investment Board has placed its first major bet on the hot U.S. real estate market, teaming up with a New York-based retirement fund manager and investing $500-million (U.S.) in two ventures.

The board has committed $300-million to a joint venture with Teachers Insurance and Annuity Association - College Retirement Equities Fund (TIAA-CREF) that will target underperforming office properties in improving markets. Its U.S. partner will put $312-million into the venture and will be responsible for managing it. The fund is aiming to hold $1.5-billion worth of assets and already has two properties, one near Washington, D.C., and the other outside San Francisco.

The second part of the deal is a $200-million investment in a fund that owns 13 prime properties, also in conjunction with TIAA-CREF. The portfolio includes office, retail and industrial properties across the United States.

Graeme Eadie, senior vice-president of real estate investments at the CPP Investment Board, said the giant pension plan is investing in the highly competitive U.S. market on a "very selective" basis.

"We are not looking to just buy assets and pay top dollar. We are looking for things that are a little off market where we can add value," Mr. Eadie said.

The fund did have some exposure to the U.S. office market through its holdings in Trizec Canada, but lost that when the company was purchased last year.

Yesterday's announcement is part of a general effort by the CPP Investment Board to diversify its real estate holdings outside Canada. Last year, the plan bought office properties in London and has other indirect investments in Western Europe.

With the move into the United States, foreign real estate now makes up about 30 per cent of the portfolio, Mr. Eadie said.

He said the fund will continue to look for other opportunities, primarily in major developed markets. Mr. Eadie said the board, unlike some other major Canadian funds, is not ready to make any big bets on emerging markets. "We are fairly conservative," he said.

Mr. Eadie said the two investments with TIAA-CREF are the result of more than a year of talks. The U.S. pension fund manager has more than $405-billion in assets under management and is best known as a provider of services to the academic, research and medical fields.

TIAA-CREF also has been active in the Canadian market through an investment in a real estate fund that is managed by RioCan Real Estate Investment Trust.

Mr. Eadie said CPP selected TIAA-CREF as a U.S. partner because of its long-term investment horizon and broad knowledge of the market.

The CPP Investment Board manages the funds not needed by the Canada Pension Plan to pay current retirement benefits. At the end of last year, it had $110.8-billion (Canadian) in assets, including about $5-billion in real estate. - 2007 Feb 28  GLOBE & MAIL

CANADA PENSION PLAN BUYS $1-BILLION SHARE IN OXFORD

The Canada Pension Plan invested $1-billion to purchase the assets of Oxford Property Group. The purchase consists of a 50% stake in 11 office properties with 8.2 million sq. ft. in Calgary, Edmonton, Montreal, Ottawa, Toronto and Vancouver. Oxford will retain the other half of the properties and continue to manage them. Oxford is the global real estate investment vehicle for the Ontario Municipal Employees Retirement System (OMERS).   - 17 June 2005

TRANSACTIONS

• Canadian Government's Pension Plan invests in Shopping Malls
• Real Estate Investment Trusts

OMERS  purchased Oxford Properties the public listed company  in 2001.  The real estate acquisition was valued at $3.8 billion Cdn

Quebec's Caisse de Depot is now Canada's largest shopping centre owner with their consolidated investments in Cambridge Shopping Centres and Bentall which has also significant holdings in Washington State in the United States

The Caisse became a bigger player in New York  and has targeted to increase holdings in Toronto

Ontario Teachers' Pension Plan Board acquired stake in the TD Centre in Toronto, the Toronto Eaton Centre and the Pacific Centre in Vancouver for $1.28-billion thru its subsidiary Cadillac Fairview

The largest landlords in the country are the Caisse de Depot, OMERS and Ontario Teachers Pension Fund.

Previously, Oxford Property Group, a Toronto listed property company acquired many of the trophy properties sold by Royal Bank of Canada and Canadian Imperial Bank of Commerce during the consolidation of the banking industry.   

Oxford added previously owned Marathon trophy real estate to their portfolio.  Marathon is the property arm of CP Rail,  who were given stipends by the Government of Canada at the turn of the last century, in exchange for building the railway which opened up the country.  Marathon owned  each of the most prime properties in Toronto, Montreal, Vancouver and Calgary.

OMERS, a fund administering the funds of the Ontario Municipal Employees, acquired Oxford in November 2001, changing the landscape of the Canadian property scene forever.

ARCHIVED STORIES

Canadian Pension Funds Amass Prime Real Estate

• OMERS grabs Oxford Group 2001

The Ontario Municipal Employees Retirement System pension fund has bought Oxford Properties Group Inc. in a deal worth $3.8-billion that will double the size of OMERS' property portfolio.  The combined OMERS and Oxford real estate portfolio will be worth $8-billion

The move continues a consolidation in the industry over the past 18 months that has seen pension funds gobble up publicly traded real estate companies.

The deal is the latest consolidation and comes in the wake of Ontario Teachers' Pension Plan Board's purchase of Cadillac Fairview Corp. and the Caisse de dépôt et placement du Québec purchase of Cambridge Shopping Centres Ltd.

• The Caisse

Caisse de dépôt et placement du Québec real estate holdings include the Eatons building in downtown Montreal, Bayshore Shopping Centre in Ottawa, Southcentre Mall in Calgary, First National Bank Centre in San Diego, Calif., Tour Pacifique in Paris's La Defense business district, One Park Place in New York's financial district.

TOTAL ASSETS UNDER MANAGEMENT, END 2000: $124.9-billion

SIZE OF REAL ESTATE PORTFOLIO, END 2000: $19.1-billion

• Ontario Teachers' Pension Plan

Holdings include Cadillac Fairview Corp., Toronto Eaton Centre, Vancouver's Pacific Centre, Fairview Pointe Claire in Montreal. Also own 49% of Maple Leaf Sports & Entertainment, a private company that owns Air Canada Centre.

TOTAL ASSETS UNDER MANAGEMENT, END 2000: $73.1-billion

SIZE OF REAL ESTATE PORTFOLIO, END 2000: $10.4-billion

• OMERS

Ontario Municipal Employees Retirement System properties include Toronto's Royal Bank Plaza and Yorkdale Shopping Centre, Canterra Tower in Calgary, and Montreal's Promenade de la Cathédrale.

TOTAL ASSETS UNDER MANAGEMENT, END 2000: $36.5-billion

SIZE OF REAL ESTATE PORTFOLIO, END 2000: $8-billion*

*Includes  takeover of Oxford Properties

• Trizec Hahn persues ambitious goals

Pension funds tower over real estate markets

The announcement  that the Ontario Municipal Employees Retirement System (OMERS) has bought Oxford Properties Group Inc. means that pension funds now own most of the trophy office towers in Canada.

The move also signals a sea change in the economic environment that individual investors should note.

In the past two years, the Ontario Teachers' Pension Plan Board paid $2.3-billion for the 78% of Cadillac Fairview Corp. it didn't already own; British Columbia Investment Management Corp., the province's public employee pension fund, bought seven properties from Canadian Imperial Bank of Commerce (CIBC) for $850-million; and the Caisse de dépôt et placement du Québec has acquired and merged Ivanhoe Inc. and Cambridge Shopping Centres Ltd. into a $7-billion behemoth.

In addition, the Quebec pension fund has recently increased its stake in real estate developer and manager Bentall Corp.

Some of this takeover activity is good news. At least there is one sector of the Canadian economy that's not being snapped up by companies based in the United States, attracted by the flaccid Canadian dollar.

For the pension funds, the reasons are obvious. They get long-term predictable cash flow from commercial and retail tenants, plus equally predictable returns.

Banks and others became sellers because real estate management was not a core competency and they could not get the economies of scale they wanted. Their returns were lower than a pension fund could produce using the same assets. The banks took the money they received and redeployed the capital by buying other financial services companies.

There are also some ironies at work here. Yesterday's deal means OMERS picks up the rest of the properties it bought in 1999, in association with Oxford, when the two organizations paid Royal Bank of Canada $827-million for 33 office buildings.

The bank's landlords are now unions. Maybe those unions will raise rents for their bank tenants at the same pace as the banks increase their service charges.

Once a bank or a real estate owner has decided to sell, pension funds are obvious buyers for property placed on the market by taxpaying corporations because pension funds are able to organize themselves to pay lower taxes.

Because their portfolios are larger, pension funds can achieve a real rate of return (after inflation) from their real estate holdings in the 5% to 6% range.

Those sorts of annual returns might not have been very appealing during recent years when stock markets were rocketing but with the Toronto Stock Exchange delivering a negative return this year, such numbers are beginning to look pretty good.

The pension fund acquisitions are a signal that the party's over. Real rates of return in unleveraged real estate for everyone else will look like the 35-year average for that asset, about 4.5% annually.

For stocks, real rates over the past 25 years were 13.5% annually, with bonds checking in at 6.5%.

Most investors with a mix of assets will be unable to muster better than single-digit returns.

Now for the other bad news, pension funds are faceless.

Even the pensioners who depend upon their investment managers to keep them warm, fed and housed in their dotage have no idea who's making the decisions.

In contrast, real estate empires were in the past built by brash risk takers. Oxford was started by one man, Don Love, in 1960. Cadillac Fairview began in 1953 as Cadillac Contracting Corp. The founders included two engineers, Joe Berman and A.E. "Eph" Diamond, as well as electrical supplier Jack Kamin. The company name was inspired by Mr. Kamin's 1951 Cadillac.

Pension funds neither want such poetry in motion nor any entrepreneurial skills.

Time was when family fortunes were made in real estate. Every Canadian community had its power-brokers who owned Main Street, the local mall or the entire downtown. In the 1970s, Peter Drucker predicted that pension funds would one day own us all.

That time has come. The new money managers are now in charge. Invite them out to dinner, especially if you need a little help paying the bill. Or want to eat tomorrow.  - by Rod McQueen, Senior Writer        Financial Post    2001

Today's market has lower debt, 'stronger hands'

In 1992, Canadian real estate empire Olympia & York Developments Ltd.'s filing for bankruptcy protection was felt by lenders and investors around the world.

Other big developers including Bramalea Inc. and Campeau Corp. went under around the same time, and an office building boom that had been sparked by easy debt led to a glut of supply during an economic downturn.

Now fears have arisen that cracks appearing in the financial services sector, fuelled by the weakening U.S. economy, could conspire to again pull down the Canadian commercial real estate market. But unlike the late 1980s and early 1990s, things are much different this time around, industry watchers said.

Different owners, lower interest rates, and a more conservative use of leverage, combined with lower vacancy rates, all mean that even in the event of a slowdown the sector is unlikely to experience a meltdown, said Michael Smith, analyst at National Bank Financial.

"What you had then were developments in weaker hands with higher debt, as opposed to stronger hands with less debt now," Mr. Smith said. "For example, today you have long-term investors that are highly unlikely to be financing a project with 30-day commercial paper."

Big pension fund-owned real estate firms including Cadillac Fairview Corp. and Oxford Properties Group Inc. have become some of the country's most prominent owners of high-quality real estate. With their long investment timelines and strong cash positions, these firms are unlikely to step into the same pitfalls as their predecessors, Mr. Smith said.

Also at issue is the amount of office space available. A debt-fuelled building boom in the early to mid-1980s led to a vast oversupply that curbed development for the better part of a decade, said an industry source.

"There was so much speculation during that time, developers were borrowing 100 per cent of their projects, because really, why not? The problem was that the economic fundamentals weren't always that strong."

By contrast, developers are more prudent now before the shovels go into the ground, the source said.

For example, downtown Toronto's three major office projects in development, the Bay-Adelaide Centre, the RBC Centre and the Telus Tower, already have their large anchor tenants in place.

The national average vacancy rate for downtown office space was 5.6 per cent in the fourth quarter of 2007, according to CB Richard Ellis Ltd. (CBRE).

This means there's a real need for the new office space being built primarily in Toronto and Calgary, said Blake Hutcheson, president of CBRE.

"We haven't got overbuilding like we did in the 1980s, instead it has been very disciplined," he said. "Our main way of looking at 2008 is to worry a bit but not to panic."

While there will likely be some layoffs in the Canadian financial services sector, they are unlikely to come all at once or to have an immediate impact on the country's core real estate markets, the source said. That's because many firms are already short of space, or have moved their back office staff to the suburbs, he said.

Canada's real estate sector fundamentals are stronger than those in the U.S., said Ed Boomer, managing director of Canadian operations for U.S.-based shopping centre owner and operator Kimco Realty Corp.

"I don't think we're becoming anxious about the Canadian real estate market," he said. "If you're a well-placed, cash-based opportunistic player I think you can do very well."

Some areas of weakness include hard-hit manufacturing centres, where industrial and retail properties may not be the best assets to invest in, Mr. Boomer said.

The Calgary office market also runs some risk of becoming oversupplied, Mr. Smith said.

As of the fourth quarter of 2007, there were 9.6 million square feet of new office space being built in Calgary and slated for completion in the second quarter of 2011, according to CBRE.

That compares with 4.5 million square feet under development in Toronto due for completion in the fourth quarter of 2010. -    2002 January 22   THE GLOBE & MAIL

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