Canadian pension schemes continue to invest overseas

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Cash rich Canadian investors target US and UKWhile many of the more developed property markets around the world continue to slide it has been revealed that yet more Canadian pension funds are looking to invest substantial amounts of money in bombed out overseas property markets. The latest pension fund to announce a major overseas investment programme is the Canada Pension Plan Investment Board which has put aside $1.4 billion for the US and UK property markets.

So why are the US and UK property markets so attractive to overseas investors?

While local investors in the US and UK property markets have disappeared, investors from the likes of Canada seem to be taking something of a more long-term view and picking up bombed out investments offering very attractive rental yields. On the surface it may look as though these two well-developed markets are friendless but there appear to be a number of major property investment funds waiting on the sidelines with substantial investment funds available.

Historically the US and UK property markets have been amongst the best performing in the world and many overseas investors appear to believe the ongoing downward spiral in property prices offers a very attractive long-term investment opportunity. While these funds may not see an immediate uplift in their investments there is potential for substantial long-term asset growth and because of the very nature of pension fund investments they are able to take this longer-term approach.

Why are local property investors not active?

Canada is one of the very few countries around the world which has remained relatively untouched by the ongoing global economic slowdown due in the main to the recent economic revival of the country, strong property holders and their relatively unaffected financial sector. When you compare this to the likes of the US and UK there could not be a greater divergence in recent performance, prospects and the general mood amongst property investors.

Seemingly it actually takes an outside investor, relatively detached from the local property markets of the US and the UK, to see the longer term investment potential even though we may not have reached the bottom of the property market slump as yet. Those who are willing to take a more long-term approach to property investment in bombed out countries such as the US and UK stand to make substantial capital gains as and when these markets do finally recover.

While a recovery may take a little longer than many would have anticipated we should start to see a floor on properly asset prices over the coming months.

Why have Canadian pension funds decided now is the time?

It appears that the prospect of large numbers of distressed asset sales over the coming months, due to debt problems for individuals and property companies, has caught the attention of a number of overseas pension funds who are looking for opportunistic investment acquisitions. When you consider that the Canada Pension Plan Investment Board is valued at $120 billion they will have seen a major downturn in their US and UK property investments over the past few months.

While longer term the potential for capital growth in property assets in these two markets is substantial many property investment funds will be looking to average down their property costs and take advantage of the ongoing downward leg of the current property market slowdown.

Recent data has revealed a substantial fall in US office and retail property sales in the third quarter of 2008 with just $13.5 billion changing hands, the lowest figure since 2004. Many expect this figure to be even lower in the later stages of 2008 even though the number of properties for sale has started to grow over the last few months. It looks as though buyers have the upper hand and are looking to pick and choose their moments to invest in what are, and have been, excellent long-term asset acquisitions.

Retail, business or domestic property?

Interestingly the Canadian pension fund which we highlighted above already has substantial investments in the UK and US retail property sectors including a $590 million exposure to shopping centres in England and Scotland as well as a $125 million joint venture in Denver which takes in a number of office properties. While many of the more recent property news headlines have highlighted a fall in domestic property values this has also been duplicated in the office and retail markets where many companies are struggling financially and demand in many areas has literally collapsed overnight.

With this in mind, an investment into the retail and business sectors of the UK and US may look particularly foolish at this point in time but on a long-term view we are starting to see substantial potential for capital growth over the coming years. The bottom line is that if the UK and US economies do not recover then there is little chance of more under developed economies recovering and the world would literally be in a depression. So while the timing may look odd to those on a more short-term timescale these two well-developed property markets are starting to appear very good value for those with patience.

Summary

While the likes of UK and US property markets have been at the forefront of the worldwide sector for many years the sudden disappearance of investors and sudden increase in properties for sale has seen these two markets literally obliterated over the last 12 to 18 months. The economic outlook for the two is very similar with national debt higher than ever before, government debt very much out of control and no sign of an economic upturn on the horizon.

Even though we are seeing a great number of overseas investors looking at the UK and US property markets, local pension and property investment funds appear at this moment unable to take advantage due to their severely damaged financial situation. When you compare this to the Canadian market where property values have remained broadly steady it is not difficult to understand why we are seeing such strength in selective overseas markets. There is a fear that as when local investors returned to the UK and US property markets many of the more attractive distressed asset sales will have been taken up by overseas investors.

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