CPPIB eyes further China properties exposure

The Canada Pension Plan Investment Board (CPPIB) is likely to continue adding more property investments into China and Asia, after making a trio of property deals in the China market worth $681 million over the past two weeks, according to the pension fund’s head of Asia real estate investments.

And other asset owners with existing investments into the mainland real estate market are likely to similarly raise their positions, claim fund consultants.

On November 3 Canada’s largest pension fund, which has C$287 billion ($214 billion) in assets under management, brought 40% of a shopping mall from Malaysian property group Pavilion. It paid $162 million for the stake in a retail mall located in Dalian, a city located in the northeast of China.

“The investment announced in the last few weeks reinforce our long-term commitment to China, an important market for a long term investors like us,” said Jimmy Phua, CPPIB’s Asia head of real estate investments, in an email response to AsianInvestor questions.

The latest acquisition comes after the fund invested $375 million for a 25% stake in Raffles City China Investment Partners III on October 24. The company is a private vehicle managed by Singapore’s CapitalLand. On October 20 CPPIB also paid $144 million for a 49% stake in a shopping mall joint venture with Chongqing-based Longfor Properties. The three property acquisitions reflect CPPIB’s long term positive view on China, and have led investments in the country to become a more important constituent of the fund’s portfolio.

Asked if CPPIB planned to increase its China properties, Phua noted: “We will continue to pursue attractive investment opportunities both in China and other parts of Asia,” without offering further details.

CPPIB’s real estate exposure in Asia, including China, Japan, Korea and Australia, stood at C$8.7 billion as of June 30. Therefore these new investments are set to add to this total.

Asset interest

CPPIB’s latest three deals suggest the fund has added a total of $681 million to its C$9.9 billion total exposure to mainland China assets, which include real estate, public equities, private and real estate investment funds and direct investments. China investments represented 3.5% of the fund’s total assets as of June, which includes its $500 million equity investment in Postal Savings Bank of China in last December.

Also in December last year, CPPIB made an additional investment of $1 billion in its equity allocation to Goodman China Logistics Partnership (GCLP), a joint venture established in 2009 in purpose to develop logistics assets in China. The Canadian fund has now invested a total of $2.6 billion, or 45 logistic projects in 16 mainland China cities, through GCLP, Phua noted.

The Canadian pension fund’s interest reflects global asset owners’ growing interest in Asian prime real estate assets. Fund consultants said they are seeing a healthy rate of re-commitment from foreign investors who have a track record in China property exposure, despite the country’s property bubbles on resident market having reignited concerns in recent months.

Henry Ching, Hong Kong-based head of Asia real estate at Mercer Investments, said that although foreign institutions’ overall interest in China properties remains steady, the composition of participants is changing.

Strategic investors, who are usually long term investors, are continuously adding China properties investments as “the economy is still growing at a rate about three to four times faster than most matured economies,” noted by Ching. These investors are driven by long duration liabilities, and as a result tend to have a much longer investment horizon that helps inure them to short term market volatility.

But the rapid upsurge in real estate valuations around tier one cities has left new investors are thinking twice about delving into the market. And tactical investors, who hold a shorter term view for investments, have reduced their mainland property exposure due to risks associated with the slowing economy and the potential for further renminbi depreciation.

“China’s property prices has definitely made the discussion more difficult at investors’ investment committees,” said Ching. “The talk of ‘property bubbles’ especially affects investors who are only starting to invest in Asia. But we continue to see a healthy rate of re-commitment from existing investors especially into Asia strategies and funds that have a good track record,” he added.

Higher return

The stronger stomachs of asset owners could well mean that they work closely alongside with developers to develop large commercial properties, or acquire prime properties in secondary locations that often translate to better pricing. 

The CPPIB did not disclose its expected return on the latest three China property partnerships, but its annual report offers a few hints.

The fund allocated a total of $40.8 billion, or 14.6% of its total asset under management into global estate as of March, according to its annual report. This exposure generated a nominal return of 11.8% during the 2016 fiscal year. This level of return stands in contrast to its overall portfolio, which generated a nominal return of just 3.4% over the same time period.