In a year of high valuations across real estate and private equity, now is the time to sell, claims Canada Post Pension Fund’s portfolio manager Michael Rizzello.
With private equity outperforming public markets over the last few years, institutional investors have been in a rush to up their allocations. However, with valuations at an all-time high and record levels of dry powder in the market, LPs have to decide whether this is the time to buy or sell.
Canada Post Pension Fund has a vast portfolio, with ten per cent allocated to real estate investments. 85 per cent of the allocation has been deployed into property across Canada, with the remainder in the US and Europe.
The pension fund also invests directly, with the remaining third of the $24bn invested in pooled private equity funds.
The LP has only one investment in Europe; however, it is currently looking at adding another one next according to Rizzello. For now, the pension giant is looking to make a positive out of sky high valuations by becoming a seller.
Rizzello said, “It is definitely a challenge to acquire anything on the open markets now, so that is why this year we have become sellers more than buyers.
“It has been hard. The pressure on pricing is even more now, so, we have more bidders for property, yields are lower and we are dealing with interest rate pressure. We are finding that assets that were priced to perfection last year are much higher now.”
The fund is not changing strategy however, and claims they are still deploying capital to an extent, but capitalising on the volatile market is key.
Rizzello added, “We are just picking our spots and our assets, so we are not selling everything, just selling certain assets.
“Current pricing is so aggressive at the moment, so weaker property actually sells for a lot more than we thought it would have. We are now getting rid of the potential under performers. We are capitalising on better pricing and higher liquidity, and they almost go hand in hand anyway.”
The reason behind such high valuations is due to the increasing amounts of capital flooding into the real estate market and low interest rates, claims Rizzello. And, it is not just a domestic phenomenon, but an international one.
There is some difference in the markets however, and each one can offer positives.
Rizzello said, “I would say the US is more dynamic in terms of opportunities, but that being said, the European market offers better value add opportunities than the US. Overall, the US is a bit further ahead so you are seeing softness in the assets which creates an opportunity.
“When you look closely at Europe, there is still a lot of under-capitalised owners not investing in real estate or property, so there is always the opportunity for fresh equity to come in and recapitalise properties still.”
Overall, navigating the stormy markets is a challenge for any investor, but 2017 could turn out to be a positive one for Canada Post due to its sophisticated strategy.
“It could still be more of a flat story for us domestically. We have assets in Toronto and Vancouver and the indications are that valuations are up significantly. Our US investments have done ordinarily well, and Europe is ahead of expectations.”
The coming year will be different altogether, and the pension fund is likely to stray from Canada even more, pushing further and further into the US and Europe.
“I think what we will do is do more outside Canada next year and sell off some non-core properties. It is now becoming sort of a shift away from Canada and a move towards the international market.
“We are going to pick our spots more, and we do not have a budget of total capital to allocate each year, so we take the opportunities as they come.”
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