Canada’s giant pension funds are set to increase investments across Asian 
real estate and infrastructure projects as they diversify their portfolios in emerging economies.
Pierre Lavallee, a senior managing director and global head of investment partnerships at the 268.6 billion Canadian dollar ($214.4 billion) Canada Pension Plan Investment Board, said: “If there’s one area where we’re still earlier stage in our understanding and our deployment of capital it’s probably south-east Asia, and I would say that is on the to do list.”
CPPIB is already active elsewhere in Asia, with money invested there across asset classes including real estate, infrastructure and equities, local and industry media analysts reported
Speaking at the SuperReturn conference in Hong Kong on September 23, 
, Lavallee said that in south-east Asia the scheme would begin by making more real estate investments through its team in Hong Kong.
It made its first direct real estate investment in south-east Asia in August, investing C$170 million in a joint venture with Malaysia’s Pavilion Group to develop a mixed-use development project in Kuala Lumpur, Property Biz Canada reported.
Lavelle said the CPPIB could eventually open an office in south-east Asia: “We’re opening in Mumbai officially in October, which will be our second office in Asia after Hong Kong and we’re probably not done."
He added: “It’s out of our thought horizon right now, but it wouldn't be crazy to think that we would have an office there in time.”
The Wall Street Journal reported last week that the CPPIB will increase its investments in Asia Pacific by up to four times over the next decade. Lavelle said: "Our commitment to the region is significant and we’ll likely continue growing.”
Slowing growth in China has led to reduced demand for commodities, making it difficult for commodity-producing countries in the region to attract foreign investors. But the CPPIB remains bullish on China’s growth prospects and believes they will flow through to other Asia-Pacific economies and underpin long-term growth in south-east Asia and Australia, according to the WSJ report.
Canadian and American pension funds are also geographically diversifying their real estate portfolios, according to panelists at a breakfast event hosted by the Real Property Association of Canada and the United States-based Pension Real Estate Association in Toronto recently.
“There’s so much capital chasing quality real estate in the U.S. and Canada that we feel it’s too expensive, so we’ve started to point our capital outside those borders,” said Sharm Powell, director of the Canada Pension Plan Investment Board (CPPIB), which has a $34-billion real estate portfolio in 15 countries and offices in Toronto, Hong Kong, London, New York City, Sao Paulo and Mumbai.
“As we grow into these other markets, one of the things we think about first and foremost is the quality of partner and what type of assets we can access with them.”
Kevin Faxon is managing director and head of real estate Americas for J.P. Morgan Asset Management, which is involved in $75 billion worth of real estate around the world. While more than 70 per cent of that is held in the U.S., he talked about investing in Europe and Asia.
“There are many Europes when it comes to investing, so that drives you towards closed-end private equity funds that are mortgage-focused by geography or strategy,” said Faxon. “If you go to Asia, it has been exclusively a closed-end, higher return strategy.”
While the panelists are all advocates of global diversification, they admitted pulling it off can be difficult for investors with limited staff sizes to take part.
“You have to have a very long-term view of it and the ability to execute on it and stay the course, and that’s tough for some smaller organizations,” said Tom Garbutt, managing director and head of global real estate for TIAA-CREF, which has just under $90 billion in assets under management in the U.S., Europe, the Asia-Pacific region and South America.
Garbutt believes real estate is a good choice for companies looking to invest in emerging markets.
“Real estate helps us capture emerging economies, especially when those economies are high-consumption economies. Doing a retail play or a hard asset play could bring some very interesting value that you might not catch in the public market.
“We think by going into real estate through a private market approach, in certain places, does have its benefits. But you have to have the stomach to be in there for the long haul.”
Two of Canada’s largest pension funds—Caisse de depot et placement du Quebec (CDPQ) and the Public Sector Pension Investment Board (PSP Investments)—are looking to invest in the Indian infrastructure sector and have started scouting for assets, according to two people familiar with the discussions.
With a net asset under management of $240.8 billion as of 30 June 2015, CDPQ is the second largest and invests in major financial markets, private equity, infrastructure and real estate globally. PSP Investments, with assets under management worth $112 billion (as on 31 March 2015), is among the top five Canadian pension funds with its infrastructure portfolio focused on sectors such as transportation, utilities, telecommunications and oil and gas.
Both of them don’t have any significant exposure to the Indian infrastructure sector so far, said the two people quoted above, requesting anonymity as negotiations are confidential.
As Indian infrastructure assets start to mature and companies look to divest cash-generating assets, these funds are starting to evaluate possible investments here, said the first person quoted above.
Large global investors, including pension funds, have a large pool of capital and are looking at 14-15% yield opportunity in India (8-10% in dollar terms), said Vikas Khemani, president and chief executive, Edelweiss Securities Ltd. “The need for the investors, however, is for a good partner, who could execute the projects on ground,” he said.
Deals in infrastructure sector could pick up further as debt-laden infrastructure developers in India start to divest operational assets and prepare to invest in new infrastructure projects being planned by the government.
The Indian government in August allowed so-called build-operate-transfer (BOT) road developers to exit highway projects two years after completion of such projects, irrespective of the year when the project was awarded.
At the same time, global funds are also diversifying their investments towards emerging markets in search for higher yields and for many India has emerged as a preferred investment destination.
According to a 15 October survey by accounting firm EY, India was ranked as the top investment destination across the world for the next three years.
Investment bankers advising on these deals have said a number of global investors, including pension funds and sovereign wealth funds, are keen to pick up a stake in infrastructure projects, particularly operational projects in the road and port sectors.