The three sections that precede this one have dealt with pension involvement in private and public capital markets that, in one fashion or another, facilitate the financing of new and developing SMEs and larger firms in the context of Canadian economic change. The real estate market (or markets) instead consists of investor purchases of land or property and development of these. Development or redevelopment refers to the financing and undertaking of construction of new stock of real estate or renovations (e.g., improvements, up-gradings, expansions) to existing stock. Properties and development transactions can be either residential (i.e., owner-occupied or rental housing) or non-residential (i.e., commercial, industrial or retail sites).
Real estate investing is included here because of its' important position in the Canadian economy. Valuations of national real estate assets attest to this importance. One estimate put the market value of total per capita real property in Canada, both residential and non-residential, at $1.6 trillion in 1992.Endnote 107 In addition, investment activity that adds to, or augments the value of, these assets can produce exponential collateral benefits.
Canadian real estate markets have undergone dramatic structural changes in recent years. Strong economic growth, population and labour force trends drove a near forty-year span of fairly continuous prosperity since mid-century, climaxing in the boom of the 1980s. At that juncture, the boom period was succeeded by a bust that many economists attribute to a cyclical glut in development. University of Toronto professor David Foot believes that the bust also had non-cyclical causes founded in demographic shifts of consequence to residential and non-residential demand. Foot and other observers have also noted the growing impact of innovation and technological change on demand for commercial and industrial properties. Computerization, telecommunications and other information technologies, for instance, have permanently altered the productive and spatial requirements of business infrastructure.Endnote 108
Another variable is the recently reduced fiscal capacity of government at the federal and provincial levels. Historically, public policy has aimed to stimulate private sector investment in residential housing or spent directly to create new dwellings or rehabilitate established ones, especially for low and middle-income households. The 1990s have been characterized by a restricted government presence in developmental housing, with very few private supply sources ready to fill the gap.
All of this restructuring has had, and is expected to continue to have, an inordinate impact on investment in real estate. Since the late 1980s and early 1990s, Canadian markets have contracted in size, realty companies have disappeared or merged with others, investors have departed or reduced their financial stakes. Needless to say, much residential and non-residential development has also been neglected. Only since 1993 has there been some revival. Among those contending with the vagaries of this changing market environment - cyclical and structural, immediate and long-term - are employer-sponsored pension funds that have historically maintained some exposure to this asset class.
The following is a brief exploration of the nature, scope and dimension of contemporary real estate investing in Canada with special attention given to the role assumed by pension funds.
Real estate investing is fundamentally a private capital market activity. As such, it shares in practice many of the same characteristics of markets for private debt and equity placement already discussed and, by extension, many of the same barriers to entry and sustained involvement by pension funds and other institutional investors. In The Role of Real Estate in a Pension Portfolio (1994), professors Stanley Hamilton and Robert Heinkel (University of British Columbia) detail these characteristics, and others more peculiar to this investment activity, as well as some of the ensuing impediments to pension participation, in a Canadian context.Endnote 109