The economic significance of real estate investing is indisputable, especially if there is a developmental component. This is true at the national, provincial and local levels. It may be fairly argued, however, that such investing leaves its most palpable imprint in communities due to the immediate stimulus of project- driven jobs and the permanent (or quasi-permanent) provision of residential housing, commercial or industrial property, attendant communication and transportation facilities and other forms of public and private infrastructure. Informetrica and other research sources have confirmed what may be strong multiplier effects realized each time there is a new and sizeable development initiative.
Canadian and international real estate markets are undergoing quite revolutionary and long-term structural changes affecting both the natures of demand and supply. These must be considered in all future investment decisions and plans regarding this asset class. This said, there appears to be a pressing need to deal with the short-run problem of certain neglected development and redevelopment financing in Canada, in both the residential and non-residential spheres, and particularly where government fiscal restraints have created a vacuum (e.g., in affordable housing).
Canadian pension funds have played, and continue to play, a vital role in supplying real estate's capital resources. In general, this role has emphasized long-term property-holding and some related maintenance and development spending that favours non-residential sites in local sub-markets with evidently strong economic prospects. Many pension funds have signaled reticence in expanding investment activity beyond these parameters. This is primarily due to institutional memory of price shocks in the late 1980s or because of the powerful financial draw of public securities trading in the 1990s (though some benefit has accrued to real estate in this instance) or both.Endnote 132 A return to price appreciation in real estate may alter this situation, though as with middle market and venture investing trends, recently enhanced pension participation is chiefly the work of a few large public sector funds.
How likely is a major increase of pension asset exposure to real estate in the immediate future? As Hamilton and Heinkel have demonstrated, this depends on the ability of pension funds, and their advisors and intermediaries, to find ways of overcoming such private capital market barriers as investment illiquidity, immobility in a local context, comparatively high costs and risks and a shortage of specialty managers. Of course, these impediments may be all the greater if voluminous capital spending on land or property development figures into the equation. Costs and risks will also vary according to the types of development deals envisioned.
Though small, Canadian real estate markets are nonetheless mature and sophisticated enough to avail pension suppliers of a relatively broad array of participatory vehicles. Indeed, structural diversity that to some degree responds to the above-noted barriers appears to be on the rise with the introduction of such new external models as publicly-listed REITs. American real estate markets suggest still more alternative means and structures that may be instructive. CLMPC interviews with pension managers, market analysts and practitioners suggest that there has also been some marketplace absorption of lessons learned from the boom-bust experience of the 1980s. A frequently-cited example is more diversified geographic deployment of property-holding and development investing in the 1990s in national - and, in some cases, global - markets that contrasts somewhat with past practice.Endnote 133
Finally, several Canadian pension funds, especially private, multi-employer funds and those in the public sector, are demonstrating a marked interest in asset allocations to certain niche investing in real estate, including that which fills some development/redevelopment financing gaps left currently by government. Examples include new construction of owner-occupied and rental housing stock, some of which is geared-to-income or not-for-profit, and selected commercial/industrial development. A parallel interest among Canadian pension funds has arisen in relation to infrastructure and public works investment (see Infrastructure: The Newest Asset Class?). Some of this new attention to both real estate and infrastructure assets includes explicit objectives for supplementary job creation (e.g., use of local building contractors employing pension plan and/or union members).