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CPPIB Goes Christmas Shopping?
Submitted by Leo Kolivakis, publisher of Pension Pulse.
Steve Ladurantaye of the Globe and mail reports that CPP goes shopping:
The Canada Pension Plan Investment Board snapped up a Scottish shopping mall Monday, partnering with an English fund Hammerson on the $479-million deal.
The Silverburn mall, which opened in 2007, is a single-level covered centre anchored by Debenhams, M&S, New Look, Next and Tesco Extra. It provides 94 retail units let to high quality retailers, has an occupancy level of 98 per cent, and an average unexpired lease term of over 12 years. The centre attracts approximately 14 million customers per year.
“This transaction represents a unique opportunity to acquire a high quality asset alongside one of the top retail developers and operators in Europe," said Graeme Eadie, senior vice-president of real estate investments for CPPIB. "We are delighted to be partnering with Hammerson as co-investor and manager, given their proven track record in managing similar assets.”
Karen Mazurkewich of the National Post provides more details, reporting that CPP lands U.K. mall in distress sale:
Thanks to a distress sale, Canada Pension Plan Investment Board is a part owner of Scotland's second-largest shopping centre. CPPIB paid about $250-million for a 50% stake in the Glasgow Silverburn mall -- a deluxe retail property that featured 95 stores and 14 restaurants when it opened in 2007.
This latest sale boosts CPPIB's real estate assets in the U.K. to more than $1-billion from $800-million, according to Graeme Eadie, its senior vice-president for real-estate investments.
The U.K. media reported that Silverburn cost a whopping £350-million ($597-million) to build, significantly more than the £297-million CPPIB and its partner, Hammerson PLC, paid to the receiver appointed by the bank to recover its losses from the mall's original owners.
Silverburn's Retail Property Holdings Inc., a unit of Elementary Property Co., went into receivership in July.
"My understanding is our price does not pay the bank back," said Mr. Eadie.
The purchase of the Scottish mall comes almost six months after retail property values ended a 46% slump that had lasted two years. Nevertheless, Mr. Eadie is upbeat about the purchase. "This was built by a private company at the top of the market and over-levered ... but we considered it a good asset. It's fully leased, and our view and Hammerson's view is that the rents are under market, and when the renews come up we will be able to push the rents up."
Another plus is that it was one of the few retail properties on the market that was available in total and, with a footprint of a million square feet, it had major heft.
It comes as little surprise that the first real-estate plays following the economic crisis are in the U.K. "The U.K. market moved down more quickly than the other markets; we've found the bottom now, so there have been more transactions there," said Mr. Eadie.
While the pension fund is still eyeing the U.S. market, and pricing is moving down, he said there is very little being sold there yet.
Unlike Brookfield Asset Management, which bought portions of General Growth Properties' debt and bonds in order to position itself for a piece of the equity, Mr. Eadie said CPPIB is not playing in the debt markets.
CPPIB has direct holdings in three other U.K. properties: an 80% ownership in two office buildings in London and a 50% stake in Whitefriars Quarter shopping centre. Through the Westfield U.K. core shopping centre fund, the pension plan holds interests in four shopping centres in Birmingham, Derby, Northern Ireland and Tonbridge Wells.
Earlier this year, CPPIB's private-equity arm kept busy with its own shopping spree. In addition to purchasing IMS Health, one of the world's leading providers of market intelligence to the pharmaceutical and health-care sectors, with U.S.-based private-equity firm TPG Capital in a deal valued at US$5.2-billion, the pension fund joined forces with U.S. Sterling Partners to buy the Canadian customs brokerage firm Livingston International Income Fund in a deal priced at $273-million. The pension fund also announced in September that it's part of the investor group acquiring a 65% interest in Skype Technologies from eBay in a US$2-billion cash and debt, and snapped up Macquarie Communications Infrastructure Group for $1.52-billion in June.
I have nothing to add on the latest real estate purchase as it sounds like a good deal, especially if retail properties recover in the UK (not sure when this will happen as they are mired in a deep recession).
My only comment is that all these investments in private markets must be carefully evaluated relative to a benchmark that reflects the risks they're taking. And while CPPIB publicly discloses the transactions, they don't bother clearly disclosing their private market benchmarks. Without beating the point to death, this is totally unacceptable and not in accordance with best standards on pension governance.
***UPDATE***
Laura Chesters of Property Week provides crucial details on the deal, reporting that Hammerson and Canada Pension Plan buy £297m Silverburn. I quote the following:
As
revealed by Property Week on 18.11.09 the pair have entered a 50:50
joint venture which has bought Retail Property Holdings, the company
that owns the 1m sq ft Silverburn shopping centre, from The Elementary
Property Company.
The £297m price equates to £148.5m each.
The current gross rental income is £18.4m, representing an initial
yield of around 6%, and an equivalent yield of 6.8%. After operating
costs, net income will be approximately £17m in 2010. Hammerson
will be the asset manager for the joint venture.
Silverburn opened in 2007 and is anchored by Debenhams, M&S, New Look, Next and Tesco Extra. Its 94 retail units have an occupancy level of 98%, and an average
unexpired lease term of over 12 years.
Hammerson
and CPP believe the centre has rental growth, asset management and
development opportunities. Average prime zone A rents are £140/ sq ft,
with overall rents passing estimated to be up to 20% below current
market rental levels. First rent reviews at the centre start from 2012.
There
is also potential to extend the centre by around 100,000 sq ft and the
purchase of the centre includes also includes 743,000 sq ft of
development land opposite.
Hammerson will fund the acquisition from existing bank facilities which have a margin of 37.5 basis points over LIBOR.
I received this comment from Erik Andersen,a BC economist:
News
Item today (Globe and Mail); CPP IB is investing CDN $252 million to
own a 50% interest in a shopping mall in Scotland. Gross rentals are
reported to be $31.3 million, or 6.2% on the total price of $505
million.
When one removes operating expenses (particularly the management
expense to be charged by co-investor Hammerson) what will be left is
certainly going to be close to a zero return.
So once again the CPPIB is the "investor of last resort" where the
return on investment must be almost zero; then there is the risk of
owning real estate in a relatively poor part of the UK and to add
further insult to injury we Canadians are exposed to currency risk.The
sellers must just love Canadians these days as we continue to re-affirm
that the "greater fool" theory is alive and well.
I'm
not sure how he calculates a return close to zero since even after
expenses, yield looks over 5%. As for currency risk, it comes with all
foreign investments. But Erik did mention that this is "gross rental
income" and there must also be property taxes to pay, utility bills and
maintenance and repair of the asset.
Another buddy of mine who used to work in real estate sent me this comment:
I
I think the big gains will come if CPPIB can turn around and sell this property to a greater fool in the next five to ten years.
believe it is too early to invest in equity in retail RE. This said it
is possible to find very good deals. At 6% of return, this is not
enough. It is not because you have leases that you will have
revenues... companies can go bankrupt and vacate. The current normal RE
wisdom is to invest in debt and let others waste their equity until
they can not support the asset anymore... then you foreclose the asset
by kicking out the owner you become the only one in the equity
position. To invest in equity in RE you must be at the bottom of the RE
cycle... I am sure that CPPIP is too early for that case.
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***UPDATE***
Laura Chesters of Property Week provides crucial details on the deal, reporting that Hammerson and Canada Pension Plan buy £297m Silverburn. I quote the following:
I received this comment from Erik Andersen,a BC economist:
I'm not sure how he calculates a return close to zero since even after expenses, yield looks over 5%. As for currency risk, it comes with all foreign investments. But Erik did mention that this is "gross rental income" and there must also be property taxes to pay, utility bills and maintenance and repair of the asset.
Another buddy of mine who used to work in real estate sent me this comment:
I think the big gains will come if CPPIB can turn around and sell this property to a greater fool in the next five to ten years.
Leo - have a great Christmas - heading off to the Northern Plains for the duration - go figure (of course when it's below zero with a foot of snow on the ground - will likely be checking in more often than normal)
Have a Merry Christmas and a Happy New Year. Here is another comment from a buddy of mine who use to work in real esate at a large pension fund:
Leo, love your pension info.
Question - how do you calculate that CPPIB's return will be zero once Hammerson's OE is removed?
Per the update, removal of the Hammerson fee reduces current gross rental income to 17m (pounds), which leave the CCPIb's share at 8.5m (pounds) or still over 5%.
Of course, even a 5% return would be piddling (and likely well under the return that the CCPIB needs to earn to meet its nut), esp. given the risks of holding Scottish commercial real estate with a shaky history and no rent reviews until 2012.
Thanks, I edited my update since this calculation was not mine, it was a comment that I received. I agree with you, even after Hammerson claims its fee, they'll still earn over 5% yield, but does this justify the investment? The real money will come if they can turn around to sell this investment to a greater fool five or ten years down the road. Hope they succeed or else they're stuck with Scottish commercial real estate.
***UPDATE***
Laura Chesters of Property Week provides crucial details on the deal, reporting that Hammerson and Canada Pension Plan buy £297m Silverburn. I quote the following:
One comment that I received this morning said that if one removes co-investor Hammerson's operating expense, the net return to CPPIB will be closer to zero (not sure how he calulates this since even after expenses, yield looks over 5%). Then there is currency risk, but that comes with all foreign investments. I think the big gains will come if CPPIB can turn around and sell this property to a greater fool in the next five to ten years.
Gomit...
You drilled right into the crux of the problem. If there were any men of honor (honour) and integrity left in the money business they'd tell the beneficiaries the truth. If you want a decent pension, you have to save and/or pay more. I know there are politcal masters so it takes strenght to stand up straight and tall and deliver bad news.
However - and I understand this, it's human nature that the manager comes first - so since the bonus is the goal (not the pension) then at least give the contibutor that is forced into the plan the option to control what happens to his or her money within the plan. The "players" can toss the dice with the managers.
There are major tax obstacles that push people into bad decisions because they seek capital gain instead of income. That is awful long term tax planing because the person that saves and supplies the capital our systems need is then penalized because much of his interest income is taxed away (almost as much as 50%).
Leo - the greatest good you can do is to keep the spotlight on pensions everywhere.
What's a poor pension manager to do?
If he makes a traditional allocation in investment grade bonds.....they just don't pay enough to meet the obligations of the fund down the line.
And since the beneficiaries don't care to hear this sort of information, off shopping to Glasgow they will go!
Leo - keep the pension info coming. If it weren't so sad it would almost be fun watching the Canada Pension Plan blow all that money out the door. The Skype gamble was dumb - Google was already sniffing out Gizmo when CPP dumped all the bucks into Skype and they didn't even get the underlying software (idiotic).
They have taken gigantic foreign exchange risks with what are just commercial real estate investments - In this latest UK ultra high risk bet they put the chips on the table just as the UK Pound starts a long term decline. The UK consumer is in bigger trouble than most.
I enjoy your writing..Happy holidays
You too Sugar Bear, all the best for this Holiday Season!
Looks like people are getting fed up...you think?
Thou Shalt Steal
Tim Jones, parish priest of St Lawrence and St Hilda, told his congregation in York, northern England: "My advice, as a Christian priest, is to shoplift."
Jones, who according to the church Web site previously worked in Corinth, Mississippi, made his comments about what he regarded as acceptable behavior by those in need when they were desperate.
In a transcript of his sermon published in the local newspaper, "The Press," Jones said: "I do not offer such advice because I think that stealing is a good thing, or because I think it is harmless, for it is neither.
"I would ask that they do not steal from small family businesses, but from large national businesses, knowing that the costs are ultimately passed on to the rest of us in the form of higher prices."
That sounds rather un-Christian.
Or is it?
http://tinyurl.com/yztd8mf