Montreal money has teamed up with Pillar to buy UK retail. Carl Mortished looks at the Canadians coming over here.
In the property business timing is 90% of the story and few people know this better than Raymond Mould and Patrick Vaughan. They run Pillar Properties – due to float this month. Neither need any lessons in running a public company: in 1986 they brought Arlington Securities to the market in a £50m flotation and rewarded shareholders when it was taken over by British Aerospace in a £278m recommended bid.
Their reputation in reading the market correctly will be a key selling point for Pillar. There is no doubt that it was also instrumental in persuading a large Canadian investor to join forces to put £30m of equity into a £250m venture to buy UK shopping centres.
Societe Immobiliere Trans-Quebec (SITQ), based in Montreal, was set up 10 years ago to manage the property assets of Caisse de Depot et Placement du Quebec, Canada’s largest public-sector pension fund. SITQ owns a portfolio of 120 buildings – totalling 13m sq ft and worth $C1bn. As well as Caisse, its investors include the employee funds for the City of Montreal and, in the private sector, the funds of Banque Nationale du Canada and Alcan Master Trust.
Pillar has scored a major coup in bagging the Quebecois. The introduction came to Pillar through Richard Ellis “out of the blue”, says Mould, who indicated that SITQ would not be just a financial partner – it has considerable experience with shopping centres.
RE partner Andrew Huntley admits that so far the flow of funds across the Atlantic has been largely one way, with British blue-chip companies investing – and often losing – substantial sums in North America. “We have been trying for a long time to get US pension funds to invest over here. There is substantial interest, but this is the first material investment in the UK by a North American fund,” he declares.
Hopes that a haul of money from the likes of the General Motors and teachers pension funds would feed the UK property recovery have been dashed time and again. The most quoted culprit is JMB Realty’s £258m takeover of Randsworth Trust which then collapsed. “It created a lot of bad feeling,” notes Huntley.
SITQ appears to have no such qualms, not only committing £30m to Pillar but also apparently on the look out for further investment in the UK while talking to potential partners in France regarding a joint retail and office fund. It already has a $C20m stake in a Brussels convention centre alongside Compagnie Immobiliere de Belgique, part of Tractabel.
Unlike its peers across Canada and south of the border, the Caisse has a keen interest in Europe. “They have a pretty friendly relationship with the French Caisse and have a more European outlook than some others,” remarks Huntley.
But he is cautious about other US or Canadian funds following the trail blazed by SITQ: “I am a bit cynical and I take it with a pinch of salt. The SITQ deal was more to do with timing and diversification than with the returns in the UK market”.
A quick glance at SITQ’s portfolio reveals its strengths and weaknesses: a third of the assets are in prestige buildings in Montreal and Quebec with some 25% of the fund locked up in shopping centres throughout the province. The remainder is in mixed offices, retail complexes and industrial buildings. But almost all the fund is invested in a corner of North America which is prone to boom and bust and where the market is still recovering from the development excesses of the 1980s which left a trail of empty buildings across Canada.
SITQ’s Rene Tremble says that the fund wanted to diversify and chose Britain because the economic and property indicators seemed the most attractive. The decision coincided with periods of both economic and political turmoil in Canada, suggesting that more lies behind the move than a textbook strategy of spreading risk. The country is struggling with a huge budget deficit – over $C40bn – and interest rates fears in the States have sparked a series of rate hikes in Canada amounting to an increase of 3% since April.
Yields on Canadian government bonds have risen almost 100 basis points over the past month to stand at 9.4%. And overhanging all is growing uncertainty about the financial consequences of the separation of Quebec from Canada.
For its part, Pillar is keen to work with its new partner and Mould envisages spending two years in building up the joint venture with a series of purchases of around £30m. Longer term the vehicle could look for its own stock market quote. “That is a possibility,” says Mould.
