Canadian pension funds are increasingly reassessing their foreign real estate investments following a series of unfavorable outcomes. A notable example is the Canada Pension Plan Investment Board (CPPIB), which recorded an 80% loss on its investment in a San Francisco office building, selling its 45% stake for significantly less than the purchase price. Canada has been a large source of funding for emerging market real estate investments. The investment losses and mistakes place in jeopardy future foreign allocations, particularly to riskier emerging economies.
Source: Emerging Real Estate Digest
In 2015, the Canada Pension Plan Investment Board ("CPPIB") acquired a 45% take in a San Francisco office building for $219 million. The pension fund just sold those share for $43.5 million, resulting in an approximate 80% loss.
In this transaction, Hudson Pacific Properties ("HPP") and the CPPIB invested through a joint venture vehicle. The building is located at 1455 Market Street and is a 1,025,833-square-foot, 22-story, Class-A office building that fronts an entire block along 11th Street in San Francisco’s thriving Mid-Market neighborhood.
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At the time of the investment Peter Ballon, then MD and Head of Real Estate Investments for CPPIB discussed the investment rationale:
"Mid-Market’s favourable supply-demand dynamics, combined with the property’s unique scale, layout and high-quality tenant mix, make 1455 Market Street an attractive long-term investment and a solid entry into the region’s office sector. We look forward to building our relationship with Hudson, a well-aligned partner with a strong operating platform, as we expand our office portfolio on the West Coast.”
Hudson's role in the joint venture involved using its "aggressive leasing philosophy" to unlock value in the market that the investors believed to be present. Victor Coleman, Hudson's Chairman and CEO described his views on the transaction in 2015:
"Our team leased up the property’s considerable vacancy to top-tier technology companies, which signed long-term leases and built out incredible workspaces. A joint venture with CPPIB unlocks a significant portion of the value created for shareholders to date, and lays a strong foundation for our firms to explore additional investment opportunities together.”
Prior to being an office the property was a data center for Bank of America, at the time of the investment it was tenanted by Uber and Square.
About Canada Pension Plan Investment Board
Canada Pension Plan Investment Board (CPPIB) is a professional investment management organization that invests the funds not needed by the Canada Pension Plan (CPP) to pay current benefits on behalf of 18 million Canadian contributors and beneficiaries. In order to build a diversified portfolio of CPP assets, CPPIB invests in public equities, private equities, real estate, infrastructure and fixed income instruments. Headquartered in Toronto, with offices in Hong Kong, London, New York City, and São Paulo, CPPIB is governed and managed independently of the Canada Pension Plan and at arm’s length from governments. At September 30, 2014, the CPP Fund totaled C$234.4 billion, of which $25.4 billion represented real estate investments.
About Hudson Pacific Properties
Hudson Pacific Properties, Inc. (Hudson) is a full-service, vertically integrated real estate company focused on owning, operating and acquiring high-quality office properties and state-of-the-art media and entertainment properties in select growth markets primarily in Northern and Southern California and the Pacific Northwest. Hudson’s portfolio currently consists of approximately 6.4 million square feet, not including undeveloped land that can support approximately another 1.9 million square feet. Hudson has elected to be taxed as a real estate investment trust, or REIT, for federal income tax purposes, and is a component of the Russell 2000® and the Russell 3000® indices.
