Caisse to grow globally

Date: Thursday, June 8, 2006
Author: Sean Silcoff; with files from Garry Marr, Financial Post

MONTREAL - The Caisse de depot et placement du Quebec has begun a major global expansion of its real estate and infrastructure activities, with recent or planned investments in airports, shopping malls and office towers on four continents.

Senior executives with the Caisse -- Canada's largest institutional investor, which manages $122-billion on behalf of 20 Quebec pension and insurance funds -- revealed yesterday it is planning to join with local partners to start a shopping mall management firm in China and invest $50-million to $100-million in malls in Brazil.

It is also hunting for office buildings to buy in the supercharged Alberta economy.

"We'd like to have a major position" in Calgary and Edmonton, said Fernand Perreault, head of the Caisse's real estate group, one of Canada's top property investors.

"There's nothing for sale at reasonable prices. But we're a large investor, we're patient, and we'll move at the right time."

Meanwhile, the Caisse is scouting opportunities for mall investments in Russia and India.

Said Hans Mautner, head of a joint venture between the Caisse and real estate giant Simon Property Group to own and develop malls in Europe: "Russia is an enormous country [that is] under-retailed. There is a lot of disposable income, a consumerist mentality, existing shopping centres which are not brilliantly conceived but enormously successful. There ought to be an opportunity there if we can come to grips with ... how you do business [there]."

The Caisse is in the early stages of a three-year, $4.5-billion spending spree on office properties in Europe, Canada and the United States.

And this week, a consortium in which the Caisse has a 28% stake signed a (ps)10.11-billion (US$18.9-billion) deal to purchase U.K. airports operator BAA PLC. If the deal, recommended by the BAA board amid a heated bidding war, goes through, the Caisse's equity investment could be close to $2.5-billion.

Caisse chief executive Henri-Paul Rousseau yesterday confirmed the Caisse's outlay would be the single largest investment it has made since its ill-fated backing of Quebecor Inc.'s $5.4-billion purchase of Quebec cable operator Groupe Videotron ltee in 2000, which cost the Caisse $3.2-billion.

The long list of global moves is part of an effort by the Caisse to diversify its portfolio away from stocks and bonds, which it says will offer thin returns in the next decade. Instead, it is ploughing resources into "alternative" investments, namely real estate, private equity, hedge funds and infrastructure. Those account for 28% of the Caisse's holdings now, and Mr. Rousseau wants that to increase to 35%.

He said the Caisse is aiming to participate in large deals, such as the BAA purchase, where there are fewer rivals to contend with.

"We've been trying to move up the scales to be in the area of larger transactions, where there is still competition, but not too many people around [who] can do what we're doing with others."

Leo de Bever, executive vice- president with Manulife Financial, who oversees $90-billion in investments, said "for an institution like the Caisse, moving into illiquid assets and having a very international focus is absolutely the right thing to do." But he warned "the pricing of some of these assets is getting pretty heady. It's sort of reminiscent of the peak of the real estate boom."

He said the BAA deal might not be so attractive if the bidding war continues, driving down returns to a level where "you start wondering whether you should have been in bonds." And because airports and other infrastructure projects are "quasi-monopoly assets," they could be subject to politically-motivated efforts to change the rules or fee structures for private operators.

The Caisse's expansion strategy holds other risks. In China, where foreign investors have had unpleasant experiences due to loose regulation, protection of property rights and political uncertainty, the Caisse is proceeding cautiously with an investment of less than $5-million to start its joint venture to manage malls, said Rene Tremblay, head of its shopping mall group, Ivanhoe Cambridge.

"We're putting the right things in place in order to be able to invest the right way in some of these countries," he said. "So one step at a time."

But if the joint venture deal -- expected to be signed in the coming months -- works out, the Caisse may invest substantially in Chinese malls, he said. "Some Chinese investors right now are investing in shopping centres which are not particularly well designed or well leased. We'll try to work on the ones that can be fixed."

Mr. Tremblay added his group, with 20% of its $9.3-billion worth of mall assets outside Canada, could double its foreign content to 40% in the next four years, largely with new developments in Europe.

The Caisse will also face difficulty cracking the Calgary market, where the vacancy rate is effectively 0%, making office towers hot commodities for pension funds. That has led some pension funds to become developers with dozens of speculative projects around the city. One such group, Bentall Real Estate Services, is controlled by the Caisse.

Ross Moore, research director of Boston-based Colliers International, said the Caisse will have a difficult time finding property in Alberta.

"Good luck," he said. "The big stuff is already owned by the big pension funds. Maybe they can build a toll road to Fort McMurray."