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Canada’s large pensions are facing rising losses from real estate investments, according to a sector report by Fitch Ratings Inc., which concluded that fund titans are nevertheless well-positioned to absorb near-term market swings.

“Fitch believes Canadian pension fund investment portfolios will remain pressured by a challenging market backdrop, as the increased cost of debt and anticipated slower growth weigh on private asset valuations,” said Dafina Dunmore, senior director of the ratings agency.

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However, she said the funds have “exceptionally strong liquidity,” which will provide sufficient cushion to absorb investment volatility and flexibility to work through troubled investments.

“They are not forced sellers of assets,” Dunmore said.

The Canadian pension funds tracked by Fitch managed approximately $2.1 trillion of net assets as of Dec. 31, 2023.

The Fitch report looked at seven large Canadian pension funds: Alberta Investment Management Corp., British Columbia Investment Management Corp., Caisse de dépôt et placement du Québec, Canada Pension Plan Investment Board, Ontario Municipal Employees’ Retirement System, Ontario Teachers’ Pension Plan, and the Public Sector Pension Investment Board.

Real estate property values are being hit by a combination of factors including higher borrowing costs, scarcity of financing options and a general repricing of assets. The effect on office properties is amplified by the shift to remote work and Fitch expects continuing losses in Canadian pension fund office portfolios into 2025 as refinancing requirements mount.

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The ratings agency said it has not seen widespread private credit losses, though defaults are likely to tick up for the remainder of this year and into 2025 given higher debt service burdens for underlying borrowers and slowing growth. 

“Pension funds that invest directly in private credit will be put to the test with respect to their workout capabilities,” Dunmore said.

Canadian pension funds are responding to market conditions, including higher for longer interest rates, by increasingly reallocating inflows and sale proceeds to government bonds, according to Fitch. Meanwhile, the fund giants were largely net sellers of private equity assets in 2023 after binging on the asset class following several years of strong returns. 

“While further reductions to private equity are expected, Fitch believes the funds continue to be long-term investors in private assets,” the ratings agency said.

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