Fiera Capital Corp. unit Fiera Properties Ltd. is launching a new, five-year closed end investment fund designed to capitalize on the rapid and seemingly unstoppable growth of the Greater Toronto Area.
The firm’s new GTA Opportunity Fund, currently with committed capital of $55 million after its first closing in July 2016, intends to invest in well-located, value-add and development projects through a joint-venture partnership strategy. The fund is currently raising additional investor capital for its second closing, scheduled for late 2016.
“This is focused on rising demand for space in the core urban markets, and it is following along the trends of urban intensification, transit-oriented development, live-work-play, walkability scores,” said Peter Cuthbert, Fiera Properties’ chief operating office and co-manager of the firm’s CORE fund.
“You hear about all those things. This GTA fund is really driven off those themes and we think they are very sustainable over the longer run.”
Underlying the investment strategy, he added, is the steady influx of new arrivals to Canada’s biggest city: an average of 100,000 new people every year and about 37,000 new housing starts annually. Municipalities in the GTA are struggling to keep pace with the growth and the strain on infrastructure such as roads, sewers and utilities and welcoming intensification to pay its bills.
“The best way for them to capitalize so they can reinvest in this failing infrastructure, and you see it all over Toronto with the construction that is going on, is to intensify use and create new taxpayers. So it is those themes that the fund is playing off of.”
High yield play
Fiera is touting “high mid-teen returns” which is attracting both institutional capital and private high net worth capital,” said Cuthbert.
“The institutional capital tends to be institutional investors who are already comfortable with real estate and are probably already working in the core space in real estate and they are now understanding the risks and appreciating the risks and finding the risk-return structure of what we are doing to be acceptable and another diversifier within the real estate asset class.”
A common theme for investors in today’s ultra-low interest rate environment is the search for yield, something that firms such as Fiera are capitalizing on. “Yes it is yield, but the truth is that commercial real estate has become a legitimate asset class within a diversified portfolio and it didn’t used to be.
“Everybody had a 60-40 equity bond split and now they are realizing that commercial real estate with all its characteristics that are somewhat unique has a legitimate place in a diversified portfolio and adds elements that are both bond-like, or income-oriented and equity-like, so capital appreciation. Depending on how you want to structure a fund and the type of asset base that you want to invest in, you can literally manufacture a wide range of risk-reward profiles that can fit into any portfolio.”
Property in private hands
Cuthbert sees the investment prospects of the GTA fund starting with the value add repositioning of existing properties such as an old industrial building, upgrading it and increasing the rent revenue as part of the growing live, work, play theme.
“In general you are looking at buildings that have been undercapitalized, so they are probably in private hands, the family has not reinvested, they are taking all the rents out, things are starting to fall apart and they don’t want to reinvest in it.
“So we come in with intelligent capital, put it to work, and a building that is turning $3, $4, $5 in (per square foot) rent to something that is turning $14. It is pretty simple.”
At the other end of the spectrum, Fiera wants to invest in ground up development of under-utilized sites.
Fiera sees its role ultimately as the backer of six to eight development projects with about $70 million in equity at the end of the year when the fund closes. That investment capital will be boosted by debt leverage of between 65% to 70%.
“Some of it could be condo, some of it could be purpose-built rental, brand new retail, some of it could be brand new industrial. It is very opportunity driven. But it is really focused on this intensification and gentrification of older property in close proximity to long-term infrastructure.”
What’s in it for developers?
Filling the development funnel will be a partnering strategy with established developers who are project-rich but funding challenge.
“They have traditionally run around sourcing their capital from friends and family and then run it through the banks. That is quite a labour intensive process and you also have a lot of people to manage.”
Fiera’s alternative is to screen developers to select suitable partners and step up with funding. “What we have found is when you remove the task of finding the capital from the developer, the developer becomes more efficient and we are able to lever their platform with them. These guys tend to, for every project they are involved with, they already know two others that they want.”
The lure for developers, besides easier access to capital, is better financing terms through Fiera than developers would secure on their own, the executive added.
More funds in the future
Cuthbert noted that his firm targeted the GTA initially because the growth there is the strongest of any big city in the country, but said that Vancouver and Montreal are potential targets as well.
“This is fund one, there will be a fund two, a fund three, a fund four, if we have success with this one. It is why we deliberately provided a geographic focus, because we could see a series of these funds focused on different sectors and different regions and our investor client base now have an even broader choice in how they diversify and participate in the market.”
New faces at Fiera
Fiera also announced the hiring of Blair McCreadie as senior vice-president and fund manager. A 25-year industry veteran, he will be responsible for co-managing and growing the Fiera Properties CORE Fund. He was recently head of Canadian real estate at Standard Life, prior to its acquisition by Manulife Financial Corp. last year.
As well, William Secnik has joined Fiera Properties as vice-president, investments and will source and execute transactions for Fiera Properties’ investment funds. Will’s experience of more than 20 years includes acquisitions, financing, repositionings and dispositions on behalf of a cross-section of investment vehicles. He was recent managing director and senior portfolio director of real estate with Manulife Real Estate.
Fiera Properties currently has $1.7 billion of assets under management, made up of the Fiera Properties CORE Fund, the Fiera Properties GTA Opportunity Fund and its segregated accounts.