EUROPE - Europe's second-largest pension scheme ABP, the Netherland's huge €215bn public service fund, has expanded its European real estate portfolio with the purchase of six hotels in Paris, Amsterdam and Düsseldorf.

The deal, worth some €565m, is part of ABP's joint venture with US hotel chain Host Hotels & Resorts, and the Singapore government-owned Singapore Investment Corporation (GIC).

Once closed, it brings the number of hotels the partnership runs to 17, comprising 5,500 rooms in eight different countries.

The deal is said to underline ABP's commitment to real estate and in its latest three year investment review for 2007-2009, the pension fund highlighted real estate as a key alternative to equities and fixed income - asset classes it continues to divest from.

With a 10% optimum real estate weighting, ABP's asset managers believe property is the perfect diversifier as it is far less correlated to equities than other asset classes.

"The fact that real estate is a less liquid asset is no problem for a pension fund that takes a long-term view," said Patrick Kanters, head of real estate investments at APG, the wholly-owned asset manager of APG, which manages ABP's investments.

Another key element of  the scheme's property investing is that it only invests indirectly, even in its home market of, The Netherlands, through funds or special arrangements such as the aforementioned joint venture.

"This enables far more freedom to allocate resources, select specialised funds and work with the best fund managers," Kanters explained, as they do not assume responsibility for the day-to-day running of the properties.

ABP splits its real estate portfolio into three regions: the US, which accounts for some 45% of real estate holdings; along with 46% in Europe and 9% allocated to Asia-Pacific.

That said, each market requires a different approach as some are more developed than others, according to Kanters.

"The real estate market in the US is a mature market. There's plenty of market information, so prices can be predicted fairly accurately," he said.

"But Europe is different. Western Europe is mature but the recently-opened up Central and European markets remain volatile and require different risk controls."

ABP invests in a broad range of properties worldwide, with the offices, retail and residential sectors making up the bulk.

Smaller allocations include industrialreal estate and hotels but the Dutch residential is the most common holding.

‘It's a combination of low risk and low but stable returns,' Kanters argued. ‘We're comfortable with residential real estate as a risk-averse asset class."

ABP also favours listed real estate, which accounts for just over a third of the portfolio, even though listed real estate funds are more correlated with equities.

"Listed real estate is more volatile partly because it has some correlation with the equities markets, whereas non-listed real estate has little correlation and valuations are based on annual appraisals," explained Kanters. "Listed real estate is also more liquid but, because APG generally takes long-term positions, this has little effect on investment policy."

The non-listed real estate sector has the distinction of offering internally- and externally-managed funds but APG prefers the externally-managed as it can be involved in shaping their investments and monitoring governance.

"With this kind of real-estate fund, you have more control than with a listed fund. You can talk to the management about investment strategy and ultimately agree a strategy with them," Kanters said.

Topics