Update on Bentall Kennedy Canadian Real Estate Plus Segregated Fund

September 29, 2014

Plan sponsors may wish to consider whether this investment news has any implications for the investment options available within their plans.

In November 2013,  Sun Life Financial added the Bentall Kennedy Canadian Real Estate Plus Segregated Fund (CREP) to our Core investment platform. To date, the Fund has been well received by plan sponsors and has significantly grown in assets since its inception. As of August 31, 2014, there were 24 clients invested in the CREP, with a total of $16 million in assets under management, and an additional $25 million in assets expected by year-end.

Following a relatively large deposit in CREP in July 2014, Bentall Kennedy has confirmed that CREP’s allocation to Prime is now approximately 30%, which is below its target of 70-80%. The remainder of the CREP’s allocation is invested in a mix of cash and REITs. Bentall Kennedy expects to increase CREP’s allocation to Prime back to the targeted range over time, as Prime draws down capital for new investments.

Background
CREP invests in three underlying components, with the following target allocations:   

  • 10-20% Cash
  • 10% Real Estate Investment Trusts Exchange Traded Funds (REITs)
  • 70-80% units of the Bentall Kennedy Prime Canadian Property Fund (Prime).

As of June 30, 2014, Prime had a gross property value of $3.5 billion; 60 properties; 131 investors (CREP being one investor). Also as of June 30, 2014, CREP's allocations were: 69% Prime, 10% REITs and 21% Cash.

While CREP accepts new investment on a daily basis, Prime accepts inflows at quarterly subscription windows (July, October, January and April); this is not uncommon for institutional real estate funds which invest directly in physical properties. At each quarterly window, Bentall Kennedy decides how much new investment they will allow into Prime based on the opportunities they have to purchase real estate assets.   

Current allocation to Real Estate
As a result of the large deposit in July 2014, which represents more than half of CREP's current assets, and a queue to invest in Prime currently in place for all investors including CREP, CREP was unable to acquire sufficient Prime units during the July subscription window to achieve its 70-80% target allocation.

When the real estate market transaction volume is low, a queue can form - essentially a first-come, first served waiting line to invest in Prime. Investment queues have become common among Canadian open-ended real estate funds this year as investment demand from pension funds and other institutional investors has been relatively steady, while the commercial property markets have experienced a lull in sales activity compared to the last several years. Currently, CREP has a large outstanding subscription to Prime in a relatively high priority in the queue.

Bentall Kennedy expects that transaction activity will pick up again in September and October, which they see as typically active months for new offerings.

Conclusion
We expect CREP's allocation to Prime to increase over time to its target weighting of 70-80%. Bentall Kennedy has an established track record of effectively managing real estate through different market environments and successfully deploying new capital through multiple cycles. Due to the large transaction sizes typical in commercial real estate, the Prime fund's total committed and undeployed capital has ebbed and flowed over Prime's history dating back to 1983. When evaluating real estate, it is important to maintain a long term focus as the asset class provides many benefits to those who invest for the long term. These benefits include stable cash flows and income yield, a hedge against inflation, and low correlation with traditional asset classes.  

As one of the largest managers of institutional real estate, Bentall Kennedy is well-positioned to participate in large real estate transactions when they are available in the market. The firm continues to maintain a disciplined focus, carefully evaluating each property to ensure it meets the necessary criteria for investment. CREP's main investments include office buildings, retail shopping centres, warehouses, multi-family residential buildings and land.  

We continue to believe that CREP provides group plan members with the opportunity to invest in high-quality commercial real estate that is otherwise only available to large institutions such as defined benefit plans, endowments and foundations.   

Questions?
Please contact your Sun Life Group Retirement Services representative.