The Caisse de Dépôt et Placement du Québec is big on Europe. Alex Catalano reports.
Caisse de Dépôt et Placements du Québec is one of the pioneering north American institutions who have crossed the Atlantic to invest in European real estate.
Set up in 1965, CDPQ is now the largest public fund manager in Canada with C$62bn of assets. Investing for Québec’s public sector pension and insurance plans, CDPQ’s philosophy includes not only the usual financial aims – optimal returns and security of capital – but social ones: contributing to the Québecois economy is part of the mission.
As of last July, some 9% of CDPQ’s assets are in property. The fund started investing in real estate in the 1970s, and now holds a C$5.8bn mixture of buildings and land, mortgages, and property shares. These activities are gathered under the Caisse Real Estate Group, run by Fernand Perreault.
But CDPQ’s real estate investment began to get more serious when in 1984 a group of six Canadian pension funds – both public and private sector – decided to pool their resources together in a vehicle. Société Immobilière Trans-Québec – SITQ Immobilier – was set up with CDPQ. SITQ has around 4.2 m m2, and had a gross income of C$216.2m in 1996.
And in 1989, CDPQ took a quantum leap, when it bought Ivanhoe, the property arm of a Canadian department store group, and acquired an interest in a quoted property company, Cambridge.
The international expansion started in 1992, part of a drive to diversify the fund’s holdings out of its heavy concentration on Québec. It first crossed the border to the US, where it has bought offices and shopping centres, mainly in New York, Chicago and Detroit. Abroad, CDPQ looks for prime properties, high current returns, and liquidity. It prefers direct investments, with local partners.
“We want partners willing to invest with us,” says Perreault. “That is difficult to find – originally we canvassed quite a lot. We stated very clearly: no projects. I think the strategy is a winning one – not just buying real estate.”
The fund also tries to get into different economic cycles, and at the right point. Says Perreault: “Outside Canada we are kind of opportunistic investors. For 1998, European markets look better than the US, where prices are up and there is a lot of money in the market. But things might change. We don’t always succeed, but we try to be one of the first in the market.”
Today, CDPQ is active in two “conventional” markets abroad, the US and Europe, and three emerging ones: Central Europe, Asia and Latin America. Europe currently accounts for about 25% of its real estate holdings.
The first foray was to Belgium in 1993, where SITQ teamed up with Compagnie Immobilière de Belgique, buying a stake in the 24,350 m2 Albert Borschette conference centre in Brussels, let to the European Commission. Le Bréderode, a 24,601m2 office building followed. Last year, CIB returned the compliment, becoming the first of SITQ’s European partners to take a stake in a Canadian property. However, currently Belgium is on the back-burner. “We will not be a very active buyer in Belgium for the next couple of years,” says Perreault.
The Canadian’s second European beachhead was in the UK, where in1994 SITQ teamed up with the quoted property company Pillar to set up a joint venture specialising in shopping centres. From an initial equity investment of £30m, the PillarCaisse fund has built up a £215m portfolio. This year it made its first sale, raising £13.5m from the Fairhill shopping centre in Ballymena, Northern Ireland, getting a return of over 20% on the investment. It subsequently sold another, Western Flavel for £34m and bought Middleton Grange for £54m.
Perreault is still keen on the UK, although he sees the real estate cycle more towards the higher than lower point. “We’re looking for property where we can add value through management, redevelopment, improvement.”
France, first breached in 1995, has been the focus of most recent investment. Initially, SITQ bought into an 59,300 m2 industrial park at Saint-Ouen Docks. Here, the local partner was Groupe Aaron and a second phase has been built. But the big hit came this May, when the Canadians splashed out for a FFr 4.2bn package of five office buildings in La Défense. This purchase has now been partly refinanced with an innovative bond issue (see Europroperty Nov 1997), which raised FFr 2bn secured on five of the buildings.
The deal involved a net equity investment of FFr 425m for SITQ, which now holds the buildings in a 85:15 joint venture with the vendor, Compagnie Générale des Eaux property subsidiary CGIS. The plan is to grow this vehicle – acquiring more property – and maybe eventually spinning it off.
“La Défense is the type of project that might be floated – we’re not excluding it as a possibility further on,” says Perreault. But that is some years down the road: “the first step might be to seek other private investors”.
And another CDPQ real estate arm, Cadim, teamed up with Lone Star Opportunity Fund and Astotel to buy six Parisian hotels, 330 rooms in total. The package was sold by private family owners, Legros, for around FFr 300m. Cadim, which focuses mainly on residential properties and “unconventional” real estate where partners normally assume responsibility for asset management and day-to-day running – has a 29% stake.
More French investment is on the cards. “France is at the bottom of the cycle,” says Perreault. “We will certainly be a very active buyer in the French market – mostly offices and residential. I’m open to looking at residential projects.
“We also think Spain is an interesting place to invest and are actively looking there. And northern Italy is also interesting. But we are very prudent and look at markets a long time before we do anything – maybe next year,” says Perreault. He is not keen on Germany, for the moment.
CDPQ is also targeting emerging markets: Eastern Europe, Latin America and the Far East. Here, the focus is also on medium-sized, prime institutional-type commercial property, but low-risk residential development will be considered. The latter features in Poland, where SITQ has a joint venture with Canadian developer Intrawest to build single-family housing. In Mexico, it made a C$11.7m investment, acquiring a 42,300 m2 industrial park in Juarez, in partnership with the Bermudez Group, and CDPQ will be shortly investing in real estate funds in Asia. “Where markets are less known, and more risky we will participate in opportunity funds,” says Perreault. “But this will never form a substantial part of our overall investment.”
The fund is also starting to move into indirect property vehicles. Next year, it will set up a unit within Cadim, with the mandate to invest in publicly quoted companies and REITs. “It will start low – a minimum of C$50m-C$60m, strictly focussed on real estate companies and REITS. We will look abroad as well,” says Perreault.
