Kolivakis: 5 Reasons Behind Canada Pensions’ Real Estate Binge

Canada

Canadian companies and pension funds collectively invested $2.75 billion in commercial U.S. real estate in the first month of 2015.

In 2014, that number was a hefty $9.7 billion. What’s behind the binge? Leo Kolivakis of Pension Pulse gives 5 reasons why Canada’s pensions are snapping up real estate in the U.S., and elsewhere.

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By Leo Kolivakis, Pension Pulse

Why are they doing this? There are a few reasons. First, real estate has long been heralded as the best asset class among Canada’s large public pension funds which are increasingly shifting assets away from volatile public markets into private markets, especially real estate and infrastructure which offer more predictable yields over the long-run.

Second, Canada’s large pension funds aren’t dumb. They read this blog and many other market sources and I’m sure the most savvy of them agree with me, Canada’s crisis is just beginning. This is why they’re scrambling to snap up as much U.S. and European real estate even though the loonie keeps declining. They know it will fall further but they also know there are better opportunities outside of Canada at this time given their long investment horizon.

Third, some of Canada’s large public pension funds, like bcIMC, are much more exposed to Canada’s commercial real estate market than others. bcIMC recently announced it agreed to sell Delta Hotels and Resorts to Marriott International for $168 million, but it has a lot more work to properly diversify its real estate holdings outside of Canada.

Fourth, in my opinion the Caisse’s real estate division, Ivanhoé Cambridge, is by far the best real estate investment management outfit in Canada. There are excellent teams elsewhere too, like PSP Investments, but Ivanhoe has done a tremendous job investing directly in real estate and they have been very selective, even in the United States where they really scrutinize their deals carefully and aren’t shy of walking away if the deal is too pricey.

Fifth, I don’t see interest rates rising anytime soon. In fact, I see central banks pumping a lot more liquidity into the global financial system. And as I recently explained, I’m not in the camp that the Fed will raise rates in 2015 and risk making a monumental mistake.

Having said all this, the rush into real estate and other illiquid alternatives worries me. Why? Because I’m increasingly worried about global deflation and the long-term effects it will have on all investments, especially illiquid private markets.

Don’t get me wrong, done properly, real estate, infrastructure and private equity are great asset classes. But as global pension funds and sovereign wealth funds topple over each other to find deals, they are significantly bidding up prices, lowering prospective returns on all private market investments, and this will really hurt them if a prolonged period of deflation sets in.

A long time ago I wrote a comment asking whether pensions are taking too much illiquidity risk. I think you should all read that comment again and keep it mind as you plow into U.S. and global real estate. Sure, pensions should take the long, long view, but they also need to be acutely aware of price entry and how a prolonged period of debt deflation impacts all their investments, especially private market investments.

 

 

Photo credit: “Canada blank map” by Lokal_Profil image cut to remove USA by Paul Robinson – Vector map BlankMap-USA-states-Canada-provinces.svg.Modified by Lokal_Profil. Licensed under CC BY-SA 2.5 via Wikimedia Commons – http://commons.wikimedia.org/wiki/File:Canada_blank_map.svg#mediaviewer/File:Canada_blank_map.svg

New York Teachers Pension Commits $125 Million to Grocery-Focused REIT

grocery store

The New York State Teachers Retirement System is investing $125 million in a real estate investment trust (REIT) that owns grocery stores and shopping centers across the country.

More from Investments and Pensions Europe:

New York State Teachers Retirement System has invested $125m (€109m) of growth capital directly into Donahue Schriber Retail Group.

The investment, made in-house without the help of external advisers, will be used by the real estate investment trust (REIT) to make additional property investments.

[…]

NYSTRS told IP Real Estate that its assets were located in areas with strong demographics and were less prone to large swings in value compared with other commercial real estate sectors.

In the last two weeks, Donahue Schriber has closed on two new acquisitions in California: the 320,000sqft Village Oaks shopping centre in San Jose, California for $111m from California State Teachers Retirement System and PCCP; the 91,300sqft Gilman Village in Berkeley for $33m.

The NYSTRS managed $108.2 billion in assets as of June 30, 2014.

 

Photo by  Gioia De Antoniia via Flickr CC License

Pennsylvania Pensions Will Get $15 Million Piece of S&P Settlement

Pennsylvania

On Tuesday, credit rating agency Standards & Poor’s entered a $1.375 billion settlement with 18 states over the alleged inflated ratings it gave mortgage-backed securities which eventually turned toxic.

Pennsylvania is receiving a $21.5 million chunk of the settlement. Of that money, $15 million will be distributed among state agencies, including pension systems.

Two of Pennsylvania’s pension systems – the Public School Employees Retirement System and the Pennsylvania Municipal Retirement System – will receive a slice of the $15 million.

More from PennLive:

Pennsylvania is to receive $21.5 million from a proposed $1.38 billion nationwide settlement over misconduct allegations against Standard & Poor’s Financial Services LLC, the country’s largest credit ratings agency, [Pennsylvania] Attorney General Kathleen Kane said Tuesday.

[…]

“We contend that Standard & Poor’s set aside its independence and objectivity in order to increase its profits, which led to disastrous results for consumers and the economy,” Kane said in a press release. “This historic settlement ends years of litigation against an industry giant and holds this company accountable for its role in the financial crisis. Attorneys General from across the country and the federal government joined together in a bipartisan fashion to show that no company is above the law.”

[…]

She said $15 million of the settlement is to be distributed to the state treasury, Public School Employees Retirement System, Pennsylvania Municipal Retirement System and the Turnpike Commission, agencies that purchased the S&P rated securities. The rest will pay litigation and investigation costs, Kane said.

The Justice Department statement on the settlement, which includes a list of the states receiving money, can be read here.

 

Photo credit: “Flag-map of Pennsylvania” by Niagara – Own work from File:Flag of Pennsylvania.svg and File:USA Pennsylvania location map.svgThis vector image was created with Inkscape. Licensed under CC BY-SA 3.0 via Wikimedia Commons – http://commons.wikimedia.org/wiki/File:Flag-map_of_Pennsylvania.svg#mediaviewer/File:Flag-map_of_Pennsylvania.svg

S&P Settlement Nets $20 Million for Iowa Pensions

cornfield

On Tuesday, credit rating agency Standards & Poor’s entered a $1.375 billion settlement with 18 states over the alleged inflated ratings it gave mortgage-backed securities which eventually turned toxic.

Iowa will receive $21.5 million, of which $20 million will be distributed among its 5 pension systems.

The distribution is as follows, according to the Des Moines Register:

Iowa’s money will be distributed among public employee retirement systems, specifically, the Iowa Public Employee’s Retirement System will get $10 million; Teachers Insurance and Annuity Association-college Retirement Equities Fund will get $2.5 million; the Peace Officers’ Retirement System will get $2.5 million; the Municipal Fire and Police Retirement System of Iowa gets $2.5 million and the Iowa Judicial Retirement Fund gets $2.5 million.

“We think that’s appropriate because it’s possible that these (systems) had some of these residential mortgage-backed securities … But probably more significantly, because this whole failure by S&P played such a role in the financial downturn, all five funds were affected very significantly,” Miller said. “It’s a good settlement.”

Miller said employees who have these retirement systems may not individually feel the results of this settlement but there will be a greater amount of money in reserves to support retirement checks in the future.

The Justice Department statement on the settlement, which includes a list of the states receiving money, can be read here.

Video: Lawmaker Talks Pennsylvania Pensions, Reform Plan

In this video, Pennsylvania State Rep. Warren Kampf [R] talks at length about the state’s pension systems – including funding, budget implications, and reform — and how he would address these issues.

 

Feature Photo credit: “Flag-map of Pennsylvania” by Niagara – Own work from File:Flag of Pennsylvania.svg and File:USA Pennsylvania location map.svgThis vector image was created with Inkscape. Licensed under CC BY-SA 3.0 via Wikimedia Commons – http://commons.wikimedia.org/wiki/File:Flag-map_of_Pennsylvania.svg#mediaviewer/File:Flag-map_of_Pennsylvania.svg

San Diego Settles 12-Year-Old Pension Lawsuit

gavel

San Diego has settled a long-running lawsuit claiming that the city’s pension rules discriminate against single people.

The City Council approved the settlement, which will see the city pay $68,000, on Tuesday.

More on the suit from the San Diego Union-Tribune:

The litigation, which has spanned two federal lawsuits and one at the state level, claims that the city subsidizes pension benefits for married employees by providing a spousal pension benefit without forcing workers to contribute enough to cover that benefit.

Under the spousal benefit program, when a retired city employee dies their spouse receives half of the employee’s pension until the spouse dies.

The suits were filed on behalf of Janet Wood, a single woman and a 32-year city employee. She claims the spousal benefit discriminates against single people because it’s a subsidy she isn’t eligible for.

[…]

[Joe] Cordileone, the chief deputy city attorney, said in a news release this week: “Had the claim prevailed, the damages would have included an annual increase of $1.5 million to $3.5 million in the city’s required contribution. The city also would have had to contribute an additional payment for each person who retired unmarried from the city after 1998.”

While the potential damages were never tallied, Cordileone said they “easily could have been tens of millions of dollars” and that they would certainly have been “in excess of $30 million.”

Joe Cordileone, the chief deputy city attorney, called the settlement a “grand slam home run” for the city.

 

Photo by Joe Gratz via Flickr CC License

Omaha Approves Pension Changes; New Plan Goes Into Effect March 1

Omaha

On Tuesday, the Omaha City Council approved a major change in the city’s pension system.

Starting on March 1, all new city hires will be placed into a pension plan that resembles a hybrid between a 401(k) and a traditional pension, as opposed to the defined-benefit plan currently in place.

Public safety workers are not affected.

The new plan, called a “cash balance plan”, will operate like a 401(k) in that its eventual payout will largely depend on the market.

But it does guarantee a minimum retirement benefit, much like a defined-benefit plan.

Current employees will keep their pension plan. But going forward, they will have to contribute a higher percentage of their paychecks to the system.

More from the Omaha World-Herald:

The pension changes, approved Tuesday by the Omaha City Council, mark a significant step in Mayor Jean Stothert’s goal of reducing employee costs and solving the city’s pension crisis.

And, Stothert said, the new plan will protect the city from future unfunded pension debt.

“We knew we could not just accept a contract that would fix the financial problem this year or the city’s budget this year,” Stothert said. “We had to look into the future to prevent those things from happening.”

[…]

These changes are intended to prevent the pension system from running out of money, which the civilian pension plan was previously projected to do within about 20 years.

Now, according to city estimates, it will be fully funded in that time frame.

Public safety workers aren’t affected by this change, because they work under different contracts.

But change could be coming soon: the city is currently in the midst of negotiating new contracts for police and firefighters.

CalPERS, CalSTRS Nab $300 Million From Settlement With S&P in Suit Over Mortgage Ratings

The CalSTRS Building
The CalSTRS Building

It was revealed today that credit rating agency Standards & Poor’s has entered a $1.375 billion settlement with 18 states over the alleged inflated ratings it gave mortgage-backed securities which eventually turned toxic.

CalPERS and CalSTRS are the biggest individual beneficiaries of the settlement; the entities will receive more than $300 million combined.

More from the Sacramento Bee:

CalPERS said it will receive $301 million from S&P. CalSTRS said it will get $23 million.

“This money belongs to our members and will be put back to work to ensure their long-term retirement security,” said CalPERS Chief Executive Anne Stausboll in a prepared statement.

[…]

“S&P played a central role in the crisis that devastated our economy by giving AAA ratings to mortgage-backed securities that turned out to be little better than junk,” said Stephanie Yonekura, acting U.S. attorney for Los Angeles, in a prepared statement. “This historic settlement makes clear the consequences of putting corporate profits over honesty in the financial markets.”

[…]

With the S&P settlement, CalPERS said it has now recovered approximately $900 million in settlements from bad investments made during the bubble. The big pension fund already settled with Fitch but is continuing to press its suit against Moody’s.

The Justice Department statement on the settlement, which includes a list of the states receiving money, can be read here.

 

Photo by Stephen Curtin

Illinois Pensions Get $50 Million From S&P Settlement

Illinois

Credit ratings agency Standards & Poor’s announced a $1.375 billion settlement with 18 states today over the alleged inflated ratings it gave mortgage-backed securities which eventually turned toxic.

Illinois will receive a $52.5 million chunk of that settlement – with most of the money going towards its pension systems.

More from the Chicago Sun-Times:

It won’t solve Illinois’ pension crisis — not by a long shot — but it’s “better than nothing,” state Attorney General Lisa Madigan said Tuesday, announcing a $52.5 million settlement connected to the 2008 economic collapse.

[…]

Madigan’s office sued S&P in 2012, alleging the credit ratings agency “compromised its independence as a ratings agency by doling out high ratings to unworthy, risky investments to increase its profits, while its misrepresentations spurred investors, including Illinois’ pension funds, to purchase securities that were far riskier than their ratings indicated.”

“S&P abandoned its critical role in the years leading up to the economic crisis, blinded by its unyielding desire for profits,” Madigan said during a news conference Tuesday morning at the Thompson Center in the Loop.

The majority of the state’s portion will be reinvested in Illinois’ pension systems, Madigan said. To date, the state has recovered approximately $400 million for losses the state pension systems sustained after investing in mortgage-backed securities, Madigan said.

Though Madigan acknowledged the latest settlement will have little impact on the state’s pension mess, she said it nevertheless sends a message.

The Justice Department statement on the settlement, which includes a list of the states receiving money, can be read here.

Video: Harvard’s Josh Lerner on New Models of Private Equity Investment

Here’s an insightful discussion with Josh Lerner, professor of investment banking at Harvard Business School. Lerner discusses pension funds’ search for alternative ways to invest in private equity, cutting out the middleman, and more.

 

 

Cover photo by c_ambler via Flickr CC License


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