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Institutional ownership ‘here to stay’ in Canada

TORONTO — Canada’s shopping centers will benefit from the strong investment role of pension funds, but tenants at those centers are likely to include a growing proportion of U.S.-owned retailers.

That was just one of the conclusions reached at the opening session of the 2000 ICSC Canadian Convention, held in Toronto in early October, as representatives of leading shopping center development and retail companies took stock of the current situation in Canada and looked into the future — with general optimism.

The sector has entered the new millennium with a bang, experiencing a C$5 billion jump in total sales to C$99.4 billion — a showing that relieves many fears about competition from Internet retailing. Or as Robert Ward, ICSC’s chairman, put it, “The obsolescence of bricks and mortar is greatly exaggerated.” E-tail sales for 1999 are estimated by Statistics Canada, the federal government data-gathering agency, to be around C$610 million; tripled, that amount would still represent less than 1% of Canada’s total retail sales.

Pension fund activity has been major news in the past two years, as public funds acquired controlling or sole ownership interests in the two leading regional mall developers, Cadillac Fairview and Cambridge Shopping Centres, both based here.

The five leading pension funds in Canada now own 19% of total shopping centers and 83% of regional malls in Canada.

In a panel discussion titled, “Revolution, Evolution and the Right Solution,” participants identified advantages in this situation, specifically in the institutions’ deep pockets, which offer financial stability and the prospect of reinvestment in existing malls.

Peter Sharpe, president and CEO of Cadillac Fairview, said he prefers institutional ownership to facing the demands of shareholders. “That kind of short-term scrutiny is not compatible with the nature of the [shopping center] industry,” he said.

“It’s a long-term business, and we’re well aligned with pension funds in that respect. They can afford to wait for a return on investment, or for the right retailer to occupy available space in a center. They invest for the future.”

Sharpe said pension funds will maintain their appetites for shopping center and other real estate investment. He also predicted that the pension fund presence will cause Canadian development companies to look increasingly outside the country for opportunities.

The flow of dollars from institutions will likely increase because public pension funds themselves are growing exponentially, experts say. Michael Latimer, managing director of the OMERS Realty Corp., investment arm of the Ontario Municipal Employees Retirement System, Toronto, said Canada’s pension funds could make between C$15 billion and C$25 billion available for shopping center investments over the next 10 years, assuming that they maintain the same proportion of their assets in real estate.

“Institutional ownership is here to stay — it’s a fundamental change in the industry,” he said. “We’re headed upstream.”

While developers are finding strong financial support at home, Canada’s retail sector is facing accelerating foreign control.

At present more than 100 U.S.-based retailers are active in Canada, up from 21 in 1992 and 10 in 1985. Panelists foresaw more of the same in coming years.

“Because of U.S. companies’ larger scale and greater access to capital, virtually all retailers in this country will be foreign-owned in five years,” forecast Larry Stevenson, chairman and CEO of Chapters Online, Toronto, the Internet affiliate of Canada’s book superstore chain, Chapters Inc.

This may be bad news for Canadian retailers, yet speakers commented on the greater vitality, strong branding and retail excitement offered by U.S. retailers.

On the negative side of the balance sheet, it was noted that Canada has the highest property taxation in the world, and growing: The $5.7 billion paid by centers in taxes in 1999 represented a 6.5% increase from 1998.

The panel, chaired by ICSC Canadian Division Operations Chairman Stephen Messinger, also included Richard Sokolov, ICSC past chairman and president of the Simon Property Group; Mitchell Goldhar, president and CEO, First Professional Management, Toronto; and John Forzani, president of sporting goods retailer The Forzani Group, Calgary.