Canadian funds eye Europe and home markets, citing rising costs and new risks south of the border
Canada’s largest pension funds are rethinking their approach to US real estate as rising costs and shifting regulatory landscapes prompt them to seek greater opportunity and stability closer to home and in Europe, reported Financial Post.
Sarah Esler, managing director and head of mortgage investments at Alberta Investment Management Corp. (AIMCo), revealed at a recent NAIOP conference that the fund is taking a more cautious stance on new US investments.
Financial Post reported that Esler said they are still waiting to see how the situation develops, which has already shifted their near-term investment strategy by reducing the dollars put into new financings.
She pointed to labour as a growing concern, noting that undocumented workers account for 15 percent of the US construction workforce.
“What we have seen is labour not showing up to sites, they are scared of people being deported,” she said. “New construction, you need to really pay attention to who your contractor is and do they have good access to labour.”
Esler also cited the challenge of hedge costs, driven by the interest rate gap between Canada and the US “It makes it almost impossible for us to make money in that market. So we shifted our strategy more towards Europe.”
Esler said capital is now flowing back to Canada, where competition is intensifying, while AIMCo has invested in the US since the global financial crisis, reported Financial Post.
Eric Plesman, global head of real estate at the Healthcare of Ontario Pension Plan (HOOPP), echoed the cautious sentiment, highlighting the impact of tariff uncertainty on investment decisions.
Plesman said no new shovels go in the ground unless everything is pre-leased, highlighting the reluctance to pursue speculative development.
He pointed to Section 899 in the Big Beautiful Bill, a proposed withholding tax on pension funds that was later withdrawn but still unsettled investors.
“Our perspective is that they were intending to raise almost US$120bn for the US treasury. If you eliminate it wholeheartedly, the question is what do they put back in place to try and make up that shortfall?” he said.
He added that the United States needs these funds to support tax reductions, which has contributed to slower capital flows. “If I look at our own book, the bar is fairly high (for a new US investment).”
Plesman observed that Canada and Europe now appear more attractive for institutional capital, with Asia also a possibility.
“I have heard this from some European investors; they have simply changed their allocation that they were otherwise making for the US to come to Canada,” he said, noting that while Canada’s economic outlook is not strong, its stability is a significant advantage. “That is an important attribute.”
Kevin Gorrie, chief executive of Granite Real Estate Investment Trust, which owns a 65-million square foot industrial portfolio with more than half in the US, said the REIT is unlikely to expand further south of the border.
“Everything comes with a price,” Gorrie said, though he acknowledged that some American markets still offer opportunity. “Pricing has opportunity in some markets. I think there is opportunity in Europe.”
Gorrie noted that tariffs have not had the expected impact, but have instead shifted demand within the US away from import-driven regions such as Los Angeles, New York, and New Jersey, and towards the southeast.
He also observed a gradual return of institutional American investors to Canada after years of withdrawal for reasons unrelated to tariffs.
“We are starting to slowly see a return of the US investors to Canada. I think they do like the stability,” he said.
