Canada’s OMERS Posts 7.2% Real Estate Loss as Interest Rates Dent Returns

OMERS, the biggest pension fund manager in Canada’s Ontario province, reported a 7.2 percent net loss on real estate investments in 2023, swinging from a net return of 13.6 percent the prior year, as elevated interest rates took a toll on property portfolio valuations.

The parent of Oxford Properties took a net investment loss of C$1.5 billion ($1.1 billion) on its real estate investments last year, compared with net investment income of C$2.6 billion in 2022.

Higher long-term borrowing costs increased discount rates and terminal capitalisation rates across all sectors, Toronto-based OMERS said in its annual report. The weaker outcome for real estate and private equity — the latter returning 3.9 percent, down from a year-earlier 13.7 percent — saddled the fund with an overall annual return of 4.6 percent, missing the benchmark of 7 percent established at the start of 2023.

The results reflected a major divergence between the performance of public and private assets in 2023, said Jonathan Simmons, chief financial and strategy officer of OMERS, which manages a portfolio of investments on behalf of Ontario municipal workers.

“Public equities and fixed income had a strong year and fixed income assets benefited from higher interest rates,” Simmons said in a release. “Returns from private asset strategies were held back by the increased cost of debt, increased operating costs, and anticipated slower economic growth, all of which are affecting private market investors worldwide.”

Asset Mix Reshuffle

Disposition activities and valuation declines reduced OMERS’s real estate investments from C$21.2 billion in 2022 to C$19.4 billion at the end of 2023, with the segment accounting for 15 percent of the pension fund’s net assets of C$128.6 billion.

The fund invests in real estate through Oxford, which oversees a global portfolio of 105 million square feet (9.8 million square metres), including 9,000 residential units and 3,000 hotel rooms.

The office sector — which represents 21 percent of Oxford’s real estate portfolio and includes the fund management platform Investa Office Management and commercial property partnership Investa Gateway Offices, both in Australia — came under the most strain last year as negative market sentiment hit valuations despite low vacancy rates, OMERS said.

The institution’s real estate troubles mirror those of Quebec pension fund manager CDPQ, which recorded a 6.2 percent loss on its property investments in 2023 as the overall portfolio posted a 7.2 percent return for the year.

Last August, OMERS approved a new long-term target asset mix including greater allocations to fixed-income investments in order to deliver similar returns as in the past but with lower volatility.

“As we look ahead to 2024, higher interest rates are creating opportunities for us to deploy capital into fixed income to improve future returns, consistent with our new, more diversified strategic asset mix,” said OMERS president and CEO Blake Hutcheson.