Kim Wright explains CPP Investments’ (Canada Pension Plan Investment Board) noble mission. “Our purpose is to help sustain the CPP by prudently investing the fund’s assets and thereby providing a foundation on which Canadians can build financial security in retirement. As such, it is absolutely vital that we capture global growth while also demonstrating resilience during periods of market uncertainty.”
The Hong Kong-based Australian is now approaching her third year as Head of Listed Real Estate at the Canadian giant. A huge part of her job, she reveals, is to ensure that the fund is appropriately rewarded for the risks it takes. The risks they must keep an eye on are growing and include areas that might not have worried yesteryear’s manager – geopolitical upheaval, climate change and reputation-related risks. Canada is increasingly famed for its progressive attitudes, and one suspects many of its citizens would be happy to see such criteria play an active role in the management of their pensions.
In practice, this means CPP Investments’ diversifying its CAD 497 billion fund across a multitude of currencies, countries and asset classes, which enables Kim and her team to keep an eye on these risks. CPP Investments’ size, scale and diversity have provided the listed real estate lead with an excellent perspective on global trends. This, coupled with the emphasis the Fund places on balancing risks, gives her a unique insight into the global headwinds that investors should pay attention to.
Growing certainty in global markets
No discussion of the risks and uncertainty today’s investors face can avoid the pandemic. She is frank about the disruption that this has caused on a global scale: “People everywhere have experienced hardship; economies were disrupted, and businesses were forced to adapt swiftly. It’s been a very challenging time for many.”
However, she is also quick to reflect that things weren’t necessarily as bad as some would have predicted. CPP Investments’ head of listed real estate, who previously spent 22 years with UBS in Sydney and London, points out: “Interestingly, the Covid-19 driven correction in share prices was relatively short-lived. Listed real estate share prices fell 45% from a peak in mid-February to trough prices in late March.” After this, the effects of monetary and social policy support kicked in and underpinned an initial recovery in share prices, which was then driven further by the vaccine recovery in late 2020.
A snapshot of market conditions today underlines the bounce back, according to Kim; listed real estate share prices are on average 5% above their pre-Covid level. There are, of course, regional and sectoral nuances, but many sectors whose prospects had been written off have been performing well too.
It shouldn’t be surprising that areas like industrial, single family housing, data centres and self-storage are above pre-Covid pricing levels – these have been supported by strong operating fundamentals. What is very encouraging, according to Kim, is that lodging and shopping centres – two of the sectors arguably most impacted by Covid – have staged a remarkable recovery and lie just 10-15% below pre-Covid prices.
When asked about the prospects of the much-maligned office sector, her view is that a lot will depend on long-term shifts in working patterns after the pandemic. “I think two major trends still being debated by market participants are just how impactful the shift to hybrid working will be on office demand and how much office utilisation will change,” she explains. “While workers appreciate the flexibility and reduced commute times home working brings, managers and business leaders recognise the importance of in-person and office-based working for collaboration, innovation, culture and learning.”
So how does this all impact the course charted by CPP Investments? “Certainly, getting both the country and sector positioning right is important for delivering excess returns above benchmark,” CPP Investments’ real estate lead explains.
Kim goes on to provide further details of how this looks in practice: “Over the last five years, getting the sector call within real estate was more important, as evidenced by the divergence in returns. Over the last five years, retail returned -3% and industrial +21% – a difference of 18 percentage points.”
Kim says that the fund remains positive on prime, well-located industrial and ground-up developments: “While capitalisation rates have compressed, this is often reflective of strong Net Operating Income growth and favourable supply and demand fundamentals.”
Though the difference between different markets has maybe not been as striking as sectors, it has still been an important call to get right: “When looking at developed countries, the worst-performing REIT market was the UK at +2%, and the best was Germany at +13.5%.”
When it comes to specific geographies, Kim is very positive about emerging markets. She describes how CPP Investments projects that emerging markets will be a real engine for growth in the coming years, and that they will ultimately account for over half of global GDP within the next decade. It’s clear the organisation senses a real opportunity here, and she mentions that CPP Investments often looks to Brazil, Greater China and India.
However, investors must adopt a careful approach to emerging markets. Kim points out that the geopolitical risks are often greater, and that “political risk is perhaps the hardest risk for public markets to price. International investors won’t be as understanding of local politics”.
According to the investment chief, government policy and regulation around the world will play a crucial role both in the economic recovery and her own strategy. Fiscal and monetary policy will obviously be crucial, but Kim is also clear that vaccine rollout schedules will likely shape the economic recovery across industry and country, which will be a watchout for investors. Furthermore, governments could embark on big spending projects such as infrastructure investment and home ownership schemes, which would also have big implications.
As the economic recovery gathers pace CPP Investments will continue to take a measured and balanced approach to risk that has Canadians’ best interests at its heart: “We tend to invest with a longer-term investment horizon. But, particularly for our public programme, we will continue to monitor the investments closely, and if expected returns are realised more quickly and go forward returns are no longer compelling, we will consider disposing more quickly”. One expects that Kim and her team will have no problem realising these returns given their diligent approach.