Manulife Financial Inc., the owner of more real estate than any Canadian insurer or bank, is betting the energy industry will fuel demand for office space in Calgary.
The benefits provider said in July it would develop a 27-story office tower in Calgary, its largest North American real estate investment since 2008. The value of the firm’s real estate holdings were C$9.3 billion ($9 billion) as of June 30, an increase of 54 percent from three years earlier.
“We understand what’s happening in the oil and gas business there,” Kevin Adolphe, who oversees C$30 billion in private assets for Manulife including real estate, said in a Sept. 12 interview from Toronto. “We’re going to continually look for acquisitions in those core markets.”
Manulife is relying on energy companies to fill office towers in the financial capital of the country’s oil-rich province of Alberta, even as uncertainty surrounds the viability of the proposed Keystone XL pipeline, which awaits U.S. government approval. Canada’s largest benefits provider said it expects returns from real estate assets to exceed the amount needed to back its customer insurance policies.
The insurer invests in office buildings across Canada, the U.S. and Asia, including in Toronto, Vancouver, Los Angeles and Hong Kong, and counts among its tenants Bank of Montreal, Canadian Imperial Bank of Commerce and Ontario Teachers’ Pension Plan. Real estate comprises about half of the long-term assets in the firm’s alternative-investments portfolio, Adolphe said.
Manulife is reluctant to invest in some parts of North America such as Manhattan, Adolphe said, and also eschews certain types of real estate, including hotels, that are susceptible to market swings. While the firm’s portfolio includes New York property holdings, it won’t be actively seeking more, Adolphe said.
“Manhattan in New York can rise to great heights, and it can plummet down,” he said. “In economic downturns, the tourism business and the retail business is significantly impacted.”
As commercial property prices surge across Canada, Manulife will probably build rather than buy in some markets, he said. The firm has a so-called landbank that it can draw from for construction projects.
“A lot of our competitors and even others are trying to buy all these assets that are driving the prices to levels that we just can’t justify,” Adolphe said. “The cities that you see we have real estate, those are the cities where we’ll continue to acquire.”
The company’s largest real estate holdings are in Toronto, Los Angeles, Washington, Boston and Chicago, based on market value, according to an investment document.
Manulife gained 0.2 percent to close at C$17.38 in Toronto trading. The shares have returned 29 percent this year, making it the second-best performer on the Standard & Poor’s/TSX Life and Health Insurance Index behind Quebec-based Industrial Alliance Insurance and Financial Services Inc., which has climbed 38 percent. The six-company index has advanced 25 percent.
The insurer sees commercial real estate providing better long-term yields than bonds, equities or credit, Adolphe said. The firm’s portfolio is 63 percent commercial properties, 32 percent industrial and 5 percent residential and retail, according to company documents. About half of the buildings are in the U.S., with 36 percent in Canada and 8 percent in Asia.
The Manulife Global Real Estate Class, an open-end fund that is managed by Adolphe and designed to mirror returns from the company’s portfolio, climbed 22 percent in the 12 months through Sept. 23, compared with the 12 percent average return of its peers.
“If you look at what the growth drivers for Canada are going to be, you look at the oil sands -- that’s going to continue to be the growth engine of the country,” said Jeff Young, chief investment officer of NexGen Financial Corp. in Toronto, who oversees about C$950 million including shares of Manulife. “Real estate in the right location is a long-term asset and wealth-builder.”
Adolphe said Manulife has “the right timing” for attracting tenants to Calgary.
“As the economy is improving, we’re going to not only see those tenants come in, but we’ll actually be able to overachieve the rents that we’ve modeled to make these buildings work,” he said.
The population of Alberta grew 3.2 percent in the second quarter, the most since 1982, according to Royal Bank of Canada. Its gross domestic product is estimated to increase 4.1 percent by 2014, the most among Canada’s 13 provinces and territories, RBC data show. Ontario, the most populous province and Canada’s financial capital, will see the second-highest rate of economic expansion next year at 2.8 percent, Royal Bank said.
The market for commercial Class-A real estate, or buildings with top quality location and tenants, is booming in Calgary. The city of 1.1 million residents has 7.3 million square feet of office space proposed or under construction, the most since 2007, according to data from Cushman & Wakefield Ltd., the closely-held real estate brokerage firm.
Gross rent of $39.63 per square foot across all the city’s building classes is the highest in Canada, while vacancy rates are the second-lowest after St. John’s, Newfoundland, the data show.
“The market is tight,” Bob MacDougall, Cushman & Wakefield’s senior managing director, said in a phone interview from Calgary yesterday. “Calgary is still in a period where the downtown landlord -- particularly Class-A and better -- is in a pretty good position.”
Manulife’s proposed 27-floor office tower is scheduled for completion in March 2017, adding to downtown commercial space that includes the 58-story Bow building, headquarters for EnCana Corp. and Cenovus Energy Inc.
The country’s western provinces are reliant on the energy industry and the ability to transport oil across Canada and abroad. That in turn affects the fortunes of pipeline, oil and gas companies as well as the number of employees and amount of office space they require.
The proposed $5.3 billion Keystone XL pipeline from Alberta’s oilsands region to the Gulf Coast is pending U.S. Senate and State Department approval amid opposition from environmentalists and other groups. As the issue is debated, TransCanada Corp., the country’s second-biggest pipeline operator, is planning to build a C$12 billion pipeline that will ship oil from Western Canada to the East Coast for deliveries to Quebec and New Brunswick.
“You’ve got political uncertainty around the pipeline announcement so that’s cautionary for the energy sector,” Cushman & Wakefield’s MacDougall said. “The economics are challenging for the energy sector. Successful developers take a longer view and they’ve got the benefit of diverse portfolios so they understand financial risk very, very well.”