There is a much broader menu of alternative means and structures to expedite pension participation in real estate than are found in other private capital markets (though these are fewer in Canada than in the United States). Pension funds can participate directly, usually through a separately-capitalized subsidiary, and through co- investment with other funds, institutional investors, and developers or realty companies. The management- intensive tasks of evaluating, acquiring, leasing, managing and disposing of assets are delegated to specialists familiar with local conditions and property types, situated internally. This may include hands-on, daily management of properties (e.g., maintenance, marketing, tenant services) or developmental undertakings. External expertise is also frequently contracted for advisory and intermediary purposes.
Most of Canada's very largest private and public sector pension funds invest directly through subsidiaries. Smaller funds instead engage indirectly through vehicles that syndicate pension assets as well as pension ownership of properties in a given real estate portfolio. There are several ways of accomplishing this, however, Hamilton and Heinkel report that the version that receives most subscriptions is corporate structures wherein pension shareholders share costs and risks. Within such structures, participatory arrangements vary. Some feature closed-end pools to accommodate illiquid investing or open-end pools that permit more regular liquidations.Endnote 121 Models may also vary according to the latitude given specialty managers to perform, on behalf of pension suppliers, the duties described above.
Both direct and indirect systems are in evidence in Canada.
Two examples of the long-standing practice of large Canadian pension funds to conduct real estate investment in-house are Canadian National Railways Pension and the Caisse de dépôt. With total allocations of close to 4.7 percent and 7.5 percent of total assets, respectively, these two fall somewhere in the middle of the spectrum of exposure among the most sizeable funds in the country.
With a long history of investing in real estate markets, Canadian National Railways Pension currently manages a portfolio, valued at $465 million, that is fairly representative of the direct approach assumed by pension funds. Key to this approach is the location of investment specialists, processes and resources internally and use of a wholly-owned subsidiary. In the case of Canadian National Railways Pension, it is Canapen Group of Real Estate Companies that administers residential and non-residential property and that executes acquisitions, dispositions and other major fiduciary decisions. Holdings may also be said to be generally representative given their diversification by type and locale. Canadian National Railways Pension has full or partial ownership in office and mixed-use buildings, such as 100 percent shares in the Hudson's Bay Centre in Toronto, Ontario, retail outlets and land. These may be found in British Columbia, Alberta, Ontario and Quebec. Most retail is indirectly-held, through investment in the publicly-listed Cambridge Shopping Centres.
Canadian National Railways Pension also participates in development from time to time, always as co- investments and partnership arrangements with established realty companies. One example is the Montreal-based complex for the International Civil Aviation Organization of the United Nations, construction for which was finished in 1996. The large parcels of land owned by the pension fund may be sites of similar investing in future.Endnote 122
After years of relevant investment experience, the Caisse de dépôt established in 1993 its Caisse Real Estate Group, comprised of five internally-managed pools featuring distinct investment mandates and operations. Ivanhoe is responsible for the acquisition, holding and development of shopping centres in urban areas in Canada and the United States. SITQ Immobilier focuses on management and development of office buildings, industrial parks, usually in partnership with other investors. Cadim specializes in residential properties, also with partners, while Cadev is charged with managing and developing Caisse-owned land. Finally, Hypotheques CDPQ holds residential and non-residential mortgage loans and related securities.
Taken together, the Caisse de dépôt's real estate and mortgage portfolio was valued at $4.8 billion at the end of 1997. Approximately 60 percent of investment was property-holding, primarily geared to commercial and industrial sites, and nearly 25 percent in mortgages. As suggested above, subsidiaries undertake some financing of development, redevelopment and up-grading activity, such as a residential project to build 300 houses on Nun's Island and a proposed plan for revitalizing Montreal's international district through the co- ordinating entity Quartier international de Montréal. Related capital spending, along with regular lease-hold improvement projects, totaled almost $80 million in 1997.