As part of OPTrust’s diversification strategy, our Real Estate Group is implementing a long-term allocation of 15% of the total fund to real estate, over a period of several years. In 2010, the real estate portfolio increased to a net asset value of $1,419 million at year end, equal to 10.7% of Plan assets, a net increase of $139 million from the end of 2009.
OPTrust’s real estate portfolio generated a return of 14.4% in 2010, compared to the Plan’s custom real estate benchmark return of 7.4% for the year.
There are a number of reasons for increasing the Plan’s allocation to real estate:
- Real estate returns have historically had a relatively low correlation with those of public stock and bond markets, where most of the Plan's assets are invested. Real estate investments are therefore expected to respond differently to economic cycles, offering the prospect of more stable returns in periods when stock and/or bond markets perform poorly.
- Real estate also tends to be highly correlated with inflation over time, providing an effective match with the cost of OPTrust retirees’ pensions, which increase annually to keep pace with inflation.
- Real estate can also be expected to generate a steady stream of income that can be used to make ongoing pension payments.
Real estate strategy
OPTrust’s real estate strategy includes holding a variety of investments that provide diversity by property type, geographical location, manager and investment style. Investments are identified, screened, purchased and monitored on an ongoing basis by portfolio managers in our internal Real Estate Group, with the assistance of external investment managers.
Our Canadian portfolio consists of office, retail, industrial and multi-residential properties that are owned directly by the Plan. OPTrust has also invested in a number of Canadian and international pooled real estate funds.
Case Study: Canary Wharf, London, UK
In 2010, OPTrust invested in the recapitalization of a prime office building in London’s Canary Wharf. The investment was made in the form of a mezzanine loan. The office building is fully leased to a major global financial services company on a long-term lease. The property is modern and well-located in the heart of the Canary Wharf business district, with a direct underground connection to London’s public transportation.
This is an excellent real estate investment, secured by a strong covenant and expected to deliver attractive returns to OPTrust. This investment is indicative of the depth and breadth of the OPTrust’s Real Estate Group’s investment activities internationally.
