The Canada Pension Plan Investment Board's latest investment in a Chinese shopping mall is part of a broader bet on the rising long-term value of property used by the country’s burgeoning middle class.
On October 20, CPPIB said it had bought 49% of a shopping mall joint venture alongside China’s Longfor Properties. It paid C$193 million ($146.4 million) for the stake.
The mall, West Paradise Walk, is in Chongqing — one of China’s largest cities with a population of over 30 million. CPPIB, one of the top ten largest retirement funds in the world, sees opportunity in catering to its increasingly wealthy shoppers.
“Over time you can systematically change the tenants to meet the changing tastes and preferences of the catchment area,” CPPIB's head of real estate investments in Asia Jimmy Phua told FinanceAsia in an interview. “Income is still rising and retail sales are still growing.'
Real estate represents 12.9% of CPPIB’s global portfolio, as of June 30, up from 10.6% in 2012. CPPIB has about $12 billion committed to China across asset classes.
The Toronto-headquartered firm and Longfor are also reformatting shop layouts; improving the marketing using and smart phone technology and providing online services for shoppers without having to spend a lot on the mall because the basic structure is already there.
The six-level shopping mall was built in 2008. “When this mall was first built eight years ago the environment was quite different; the income level of the households that used to shop at the mall has risen quite significantly,” said Phua.
To be sure, Chingqing is still not as cosmopolitan and wealthy as Shanghai but shoppers are increasingly interested in more international and upmarket products.
“The offer that the mall is providing today could be upgraded; many of the tenants in the mall cater to a lower income group, and now we are systematically renewing the tenant mix, bringing in the more international names that are not already in Chongqing,” said Phua.
For instance CPPIB plans to overhaul the mall’s supermarket which is very big and sells very local produce. It will downsize the floor plan and bring in another supermarket that offers higher-value goods. It has also introduced Korean cosmetics brands such as innisfree and Face Shop.
It plans to do the same for fashion retailers, including CK Jeans and Tommy Hillfiger.
The mall is almost fully occupied, excluding a couple of units where the operators are replacing tenants.
Longfor and CPPIB will spend the next year discussing how to refurbish the mall.
Hot spots
As China reorientates its economy to be more consumer driven, CPPIB is looking for plays on rising private consumption increasing across Chinese real estate segments.
“I do see it [investment in Chinese property] growing but there is no fixed number we need to achieve,” said Phua.
Apart from shopping malls it was one of China’s earliest investors in the logistics segment - particularly modern warehouses needed to cater to the boom in e-commerce. China's online shopping spree has meant demand for storage from household appliance makers to e-commerce giants such as Alibaba has soared.
“As long-term investors we try to identify long-term structural trends,” and back them through the ups and downs of the Chinese property cycle, said Phua.
It also likes bigger mixed use developments, such as its partnership with CapitaLand. It’s first joint venture with Longfor in 2014 was a mixed-use real estate project in Suzhou.
This strategy appears to make sense. The inconvenience of transport in some Chinese cities means developers can reap real benefits from clustering offices, malls and serviced apartments in one development. The tenants tend to stick around longer and they are also higher-paying.
West Paradise Walk is located in Chongqing’s Yangjiaping commercial hub.
Partners
CPPIB in Asia tends to coinvest with partners like Longfor that can scale up investments overtime.
“The understanding [with Longfor] has always been that we would go [from] one to do a second and a third and a fourth at the right time when the opportunity presents itself,” said Phua, who worked with several real estate companies prior to CPPIB, including ING Real Estate.
Goodman was CPPIB’s first China property joint venture partner in 2009 and they continue to co-invest. The fund has also invested alongside Sinagapore’s CapitaLand and Japan’s GLP in Japan.
“We always co-invest with local partners,” partly due to the breadth of Asia and the mix of cultures and economies, said Phua, who has worked out of Singapore, South Korea and is currently based in Hong Kong.
Each investment is set up as a joint venture, like the Chongqing West Paradise Walk shopping centre.
Elsewhere in the world, CPPIB sometimes leads investments and runs operations themselves, for example in London where is owns 100% of a student accommodation platform.
CPPIB invests the funds not needed by the Canada Pension Plan (CPP) to pay current benefits on behalf of 19 million contributors and beneficiaries. The CPP fund totalled $287 billion as of June 30. CPPIB has about $51.3 billion invested regionally as at March 31 across all asset classes.
