Toronto-based Canada Pension Plan Investment Board plans to increase its exposure to real estate credit globally, with a target to achieve about C$8 billion ($6.17 billion; €5.13 billion) to C$10 billion in assets under management in the next five years.
PERE understands that the Canadian pension fund currently has around C$4.5 billion to C$5.5 billion in real estate credit assets under management. Real estate credit investments make up 10 to 12 percent of CPPIB’s overall real estate AUM that totalled C$45.96 billion as of March 31 2018, according to PERE data.
“The credit business is a little bit like a treadmill; while we have an appetite to grow the overall AUM, we are also faced with repayments that are out of our control. Our target on a kind of steady-state basis is to be about C$8 billion to C$10 billion, which is a target that we hope to achieve within the next five years,” Geoffrey Souter, managing director and head of private real estate debt at CPPIB, told PERE.
In late July, CPPIB made its debut real estate debt investment in Australia and New Zealand by participating in A$500 million ($370 million; €320 million) of seed lending to a vehicle launched by the Sydney-headquartered investment management firm Challenger Investment Partners (CIP).
The real estate debt vehicle will provide alternative financing to owners of well-located properties in key gateway cities across Australia and New Zealand, according to an official statement. CIP will originate senior and subordinated loans, backed by stabilized, transitional and development assets.
Souter did not wish to disclose the exact amount that the Canadian pension fund contributed to the vehicle, but he made it clear that it was the lion’s share.
“We are trying to be somewhat nimble in terms of our global credit book and pursue more tactical strategies. We see an opportunity right now to deploy a decent amount of capital into the Australian market,” said Souter.
CPPIB’s foray into debt investments in Australia comes at a time when a growing number of investors are recognizing the lending opportunities created because of the Australian banks pulling back from real estate lending, especially to the small and mid-sized real estate developers.
In 2014, the Australian Prudential Regulation Authority set a cap to the banks’ lending and exposure to the real estate market, amid a slowdown in the residential market. APRA decided to end the cap this April, but added that banks instead must set internal limits with a series of more permanent measures to keep the lending standards strong.
Australian banks collectively take up 85 percent of the overall commercial real estate lending market according to Tim Johansen, managing director of real estate finance at the Melbourne-based investment firm Qualitas. In contrast, American or European banks take up a relatively small share – around 40 to 60 percent – of the commercial real estate lending market in their respective countries.
“Our view is that banks will give up 10 percent of their market share over the next 10 years, so that is a significant amount of lending that the private lending sector can hold off,” he explained.
Johansen says he is also seeing similar opportunities in New Zealand, although these are smaller in scale.
CPPIB is currently handling the bulk of its real estate credit activities out of its headquarter in Toronto to handle the bulk of real estate credit activities in North America, a Europe-focused in London, and a “small but growing team” in Hong Kong to cover Asia-Pacific, according to Souter.
He also added that CPPIB’s plans to grow its real estate credit book aligns with the insurer’s desire to have more credit exposure across all asset classes.