CPP Investments, the investment arm of Canada Pension Plan, has reduced its real estate exposure for the third time in six years after posting an annualized loss of 5 per cent in the real estate asset class for the 2024 financial year.
The Toronto-based pension fund, which has total assets of C$632 billion (US$463 billion, €426 billion), reported in its annual report that it saw an increase in real estate disposals during its fiscal year ending in March, with office assets falling to 6% of its real assets from 9% in the previous fiscal year. Retail also dragged down CPP's real estate performance but remained steady at 6% of its real assets holdings. Logistics fell 1 percentage point to 12%, with real estate's share of the fund's real assets holdings falling to 36% from 38% a year ago.
CPP's divestiture activity last year generated C$2 billion in performance fees from real estate and private equity realizations, up from C$1.7 billion a year earlier. The investor's notable real estate sales last year included the sale of a 50% stake in the Kumho Asiana Main Tower in Seoul for a gain of C$181 million. The pension fund also sold the Midland Gate Shopping Centre in Perth for C$85 million and exited a joint venture it had formed to invest in shopping centres in Australia. CPP also sold a 45% stake in a portfolio of medical office buildings in California for C$137 million.
These sales reduced CPP's exposure to real estate to 8% of its total portfolio. Real estate, along with infrastructure, are the pension plan's smallest asset allocations, each down 1 percentage point from the prior year. Private equity made up the largest share of assets at 31%, followed by public equities at 28% and credit at 13%. The remaining 12% was government bonds.
The pension system's allocation to real estate was 12.1% at the end of fiscal 2019, but fell to 11.3% the following year and to the 9% range in 2021-23.
CPP's real estate portfolio is currently split 33% in logistics, 33% in other real estate, 16.5% in office and 16.5% in retail.
Over the past five years, CPP real estate assets have risen 0.7%, the second-lowest return among the asset class. Only government bonds, which fall in value as interest rates rise, performed worse, with a five-year return of -0.3%. By comparison, private equity has risen 13.9%, public equity 8.4%, and infrastructure 5.9% over the same period.
The CPP annual report blamed rising interest rates for the poor performance of real estate assets, but noted that “investment in the logistics sector was an exception, which saw increased demand from occupiers and investors for most of the five-year period.”
“This is in contrast to retail and office investments, which have been negatively impacted by the shift to e-commerce and evolving hybrid workplace trends.”
Despite challenges in its real estate portfolio, CPP reported an 8% net profit margin and an increase in net assets of $62.3 billion last fiscal year. According to a press release, these gains were driven by strong performances in public equity, private equity, credit, infrastructure and energy.
CPP President and CEO John Graham said in a statement that while the overall strong performance was evidence of a sound investment strategy, challenges lie ahead in the form of “continued geopolitical and economic uncertainty.”