Rental rush: pension funds flock to apartment buildings

Following the financial crisis battered the U.S. market in 2008 and 2009, the real estate investing group at Quebec’s public-sector pension manager detected an interesting trend in its portfolio of holdings.

The Caisse de dépôt et placement du Québec possessed a set of apartment buildings in New York, the epicentre of the global financial collapse. Yet, despite that closeness to chaos, demand in the buildings was virtually unchanged, even as firms cut office space and customers curtailed trips to malls.

“We discovered that our investments were very resilient,” says Sylvain Fortier, who heads residential investment in Ivanhoé Cambridge, the Caisse’s property investing arm.

“We felt like our general occupancy of our buildings stayed about the same, the rents remained about the same{}”

A review of the experience helped to convince the pension plan to establish a new apartment plan in 2011 to capitalize on low-risk yields where leasing supply is tight. Six decades and a spate of deals afterwards, Ivanhoé owns over 40,000 apartment units worth about $12-billion, accounting for approximately 20 percent of its total property holdings.

After spending two years acquiring many of Canada’s largest malls and office towers, many other key pension funds and insurers are also turning their formidable purchasing power toward the old world world of rental apartment buildings.

Such institutions are trying to find options to diversify and reduce their vulnerability to retail malls, which face an uncertain future as online shopping snacks into store traffic.

But curiosity has also increased in response to high demand for apartment rentals, which is outstripping supply in some big cities across North America, delivering rents soaring and creating nearly glamorized investments for risk-averse retirement plans.

“There is always demand for housing,” stated Tyler Seaman, who heads the multifamily residential team in Oxford Properties Group Inc., the real estate arm of the Ontario Municipal Employees Retirement System.

“Your risk at a 300-unit construction is spread over 300 residents, versus a few tenants at a commercial development.”

Oxford has assembled a 9,000-unit apartment portfolio within the last ten years through holdings in Ontario, Quebec and Atlantic Canada — roughly half in the Greater Toronto Area.

“It’s absolutely an asset class we would like to grow,” Mr. Seaman says, forecasting that the holdings will double over the next 10 years.

Canada has received relatively less of their investment in flat purchasing, however.

Many large institutions are concentrated primarily on U.S. cities and markets in Europe since Canada’s biggest cities don’t have enough to buy that matches their need, says Tony Manganiello, a broker at Cushman and Wakefield in Toronto who helps customers buy and sell flats.

Mr. Manganiello says that his institutional clients are disciplined shoppers that desire large buildings near transit hubs that can attract high rents that offer a high rate of return on their investment. To make the math work, most desire higher-end tenants who will pay more rent, ” he says.

“A number of these institutions are searching for that institutional-grade merchandise and it is simply not there,” he says.

Insurer Manulife Financial Corp. has major plans for U.S. growth, fostering its flat holdings over the last five years by acquiring buildings in eight center U.S. markets.

Ted Willcocks, Manulife’s head of property asset management, says Canada has much fewer purchasing options than the USA, where his group sees an average of about 10 new buildings offered for sale daily. And in comparison to Canada, U.S. properties are usually newer and have more amenities such as pools and workout facilities.

“The U.S. market is so big and so varied and so broad,” he says. “It permits you to rapidly scale up and creep up. It’s very tricky to acquire multifamily [residential properties] in Canada.”

Realtors are also disciplined buyers and soaring prices in the Toronto and Vancouver markets — monitoring housing market booms in both cities — are becoming a deterrent to investment.

Prices in Toronto have climbed 60 percent over the last five decades, according to CBRE Canada, with apartment buildings selling for an average of $204,738 a unit in the first half of 2017, compared with $127,172 a unit in 2012. Rates are higher in Vancouver, climbing to a peak of $282,848 a unit in 2016.

Concert Real Estate Corp., a developer owned by 19 Canadian retirement plans, is growing apartment assets aggressively, but considers it is now cheaper to build new flats in markets like Toronto than to buy at current rates.

Concert chief executive Brian McCauley says new structure can be energy-efficient, sustainable and won’t need important retrofits for decades. Concert has developed 5,000 units in British Columbia and Ontario, and plans to add another 3,000 within the next five or six years — when it can get them assembled and on the industry.

“We are very bullish on continuing to grow our presence in leasing residential, for sure,” he says.

The cloud on the horizon is a brand new rent-control rule that the Ontario government announced in April that will restrict owners to increases at roughly the rate of inflation, now less than two percent annually.

Some significant developers have already announced they’ll convert planned apartment jobs into condos. However, as long-term investors, pension funds don’t shift their strategies on a dime, ” says Daniel Argiros, CEO of Conundrum Capital, that purchases and manages apartment buildings in Toronto, making apartment funds for institutional investors.

He believes institutions won’t quickly abandon apartments because rents can still go up when tenants leave, allowing slow increases across a large portfolio. However, he says investment could slow if more regulatory change continues the “death by a thousand cuts{}”

1 difficulty that giant pension funds have in the apartment industry is rapidly building a large enough portfolio of buildings to make a meaningful investment.

To find the billions of dollars needed, the Caisse has grown through partnerships with big partners, ” says Mr. Fortier in Ivanhoé.

In 2015, for example, the Caisse teamed up with U.S. private-equity giant Blackstone Group LP to Purchase Stuyvesant Town-Peter Cooper Village, an apartment development in New York, for $5.3-billion (U.S.).

The assortment of 55 red-brick buildings, home 25,000 residents, let the Caisse to purchase the equivalent of a small town in one deal.

Mr. Fortier says he’s not done yet. He intends to invest long-term from the industry, hoping to ride a tide of changing attitudes in North America about home ownership. More people in major urban centers are leasing by choice and the Caisse would like to capture that demographic change.

“There’s a demand for rental apartments globally in major cities and there is an acceptance that it is okay to lease, you do not need to get a bungalow in the suburbs with two cars and a dog,” he says.

Courtesy: The Globe And Mail

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