The funds industry is in flux as investors reassess their approach to real estate. Rachel Fixsen asks six investors what they are looking for in new products

Patrick Kanters
Still has appetite for funds with focused strategies
Interested in joint ventures and club deals - but only if they suit the strategy

The €293bn pension manager APG does not separate its listed from its non-listed property fund investments, nor does it favour one type of investment structure over another.

"We remain focused on adding listed and non-listed, since we are continuing to run a fully integrated strategy," says Patrick Kanters, APG's global head of real estate. "Sometimes the listed funds might have a better track record, but a non-listed fund might have a better structure. But since we have this long-term focus, we have proved we can generate stable returns by combining the two types, and it enlarges our universe."

APG is on the look-out for new property funds and companies to invest in. "We have been very active over the last year and a half or so, and we're looking for investment opportunities across all three regions: the Americas, Asia-Pacific, as well as Europe," he says.

The Dutch pension manager is continuing to look for focused funds, including sector funds - such as logistics and retail - and those centred on specific regions or niche strategies.

Structures such as joint ventures and club deals do interest APG, but only if they suit the overall investment proposition. "For some, we prefer joint ventures and having very strong control over the assets; in other cases a fund might be better, where market dominance is important," Kanters says.

For APG, the way the manager is rewarded is more important than the level of fees a fund charges - alignment of interest must also be created by meaningful co-investment, he says.

Looking ahead, Kanters sees the secondary funds market playing a bigger role. "The secondary market is still quite small in real estate," he says. "Where we do see opportunities to sell off and buy stakes, we do so every now and again."

Sustainability is a priority for APG, and any new manager has to fill in a questionnaire on the topic, in order to be compared to the Global Real Estate Sustainability Benchmark (GRESB).

"If a manager scores quite poorly, through defining clear measurable goals and active engagement we work to improve - and improvement is sometimes quite easy for them to achieve," he says.

John Gellatly
Aviva Investors
Looking for unlisted funds across diverse strategies
Expertise in regional market sectors - not the allocator model

The real estate multi-manager management team at Aviva Investors invests "globally, across the rev counter," according to John Gellatly, the company's head of European real estate multi-manager.

Almost all of the real estate multi-manager team's circa £6bn (€7.2bn) in property assets under management is invested via unlisted real estate funds.

"We have a bank of unallocated capital we're sitting on for clients," he says. The team is looking for fund investments for its Asian fund of funds and its emerging markets fund of funds, as well as a number of its core and core-plus European pension fund mandates.
"The money is going across very diverse strategies," he says. "Our clients are investing globally with their equity and fixed income portfolios, so why wouldn't they do this with their real estate?

"We've been putting money into the US, and we think that's quite interesting," Gellatly says. "We're also interested in Canada, but that market is quite difficult to get into, because of the dominance of the domestic institutions."

Australia and New Zealand are also attractive markets in his view, as well as Japan - where transparency is an issue.

In terms of strategy and focus, Aviva Investors is after genuine expertise. "We don't want the allocator models; what we want are the good managers who are good in their particular area," says Gellatly.

But right now, real estate debt funds are drawing his attention as well. "The interesting strategy out there at the moment is the use of debt funds. These range from senior debt all the way up to mezzanine or preferred equity funds," he says.

A key conundrum for investors in property funds is the future of the "walking dead" - funds launched by small firms that now find themselves unable to continue issuing. "If you're a relatively small manager, the regulatory requirements and the level of due diligence we require have now become such a burden that it challenges their business model.

"These models were often predicated on launching funds II and III, and investors may now not support so willingly these subsequent offers," he says.

Antonio Alvarez
Aberdeen Asset Managers
Interested in funds that can complement existing portfolios
Likely to make commitments to debt funds

Aberdeen Asset Managers' property multi-manager division is always in the market for new fund investments.

"The only time we would say no was during the financial crisis; we were interested, but it was difficult to make a judgment, so we held back," recalls Antonio Alvarez, head of investments at the division.

That said, the precise character of the property funds the manager is looking for at any one time on behalf of its pension fund clients varies enormously. "Some of the portfolios are a bit mature, so we're filling in the gaps in terms of geography, for instance," Alvarez says.

"But in general, our clients are quite risk-averse, and many of them have indicated to us that they don't want to take on more risk. So one example of funds we really have no appetite for are opportunistic strategies that involve aggressive repositioning of assets in Europe.

"They might have been suitable before, but not in this environment," he says. "Arguably, in some of these markets, it's not the time to do development, because prices might fall and existing assets might be more attractive."

In some markets, values have not come down as much as they should, and many properties have been held rather than sold, he says. But this is likely to change during the coming years.

Alvarez believes it would be smarter for European fund managers to launch products that focus on divestments by distressed sellers as opposed to broad buy-fix-sell strategies.

"If players want to create that kind of fund, then they really have to do it right now - otherwise it will be too late in the cycle," he says.

The property multi-manager team has recently become very interested in real estate debt, and is looking at mezzanine funds. "I would expect us to make at least one commitment to real estate debt this year," Alvarez says.

On joint ventures, he says there is a fine line between what is a joint venture and what is not.

"You can be a passive partner in a joint venture, and then it ends up looking more like a fund. Or it can be a limited partnership where you're on the board."

Volker Wiederrich
Swisslake Capital
Best managers offer hard-to-access sectors
Debt strategies the most compelling


Swisslake Capital sees interesting property investment opportunities in the market, and some fund managers are offering investors access to these. "Best-in-class fund managers continue to deliver the strongest off-market sourcing capacities," says Volker Wiederrich, chief investment officer at the Swiss property investment advice firm.

"Many of them have access to very attractive deal pipelines with investment opportunities that are otherwise difficult to access on the direct market."

This was particularly true for the core and core-plus segments, where competition has been fierce over the past 12 months, he says.

Given the recent state of the property markets - characterised by a flight to security - investors have become increasingly interested in active management approaches, he says. "In terms of specific strategies, we outline the attractiveness of debt funds and opportunistic distressed funds in Europe and the US. The debt strategy is the most attractive at the moment, in our opinion."

Wiederrich says the on-going financing gap on both continents means there is still a real abundance of funds delivering very high cash-yields. This is exactly what many risk-averse investors are after, he says: investments that produce a stable, high income, and ones that are capable of stabilising their portfolios.

Because volatility remains institutional investors' prime concern, many have retreated from the listed markets. "Club deals and joint ventures have been very appealing to investors in the past two years, reflecting the need for a higher degree of control in investments and a reduction in counterparty risks," he notes. "The volumes in these segments have steeply increased, leading to the situation where many of the smaller investors have no capacity to participate."

And many fund managers have recently been arranging funds with more co-investment opportunities. "So, effectively, investors are slowly returning to traditional unlisted pooled vehicles," he concludes.

When selecting funds, investors are now particularly focused on is whether a manager is really applying the stated strategy. "Although they have raised the necessary equity," he says, "many fund managers in the past two years were not able to invest the capital."

Marian Berneburg
Ärzteversorgung Westfalen-Lippe (AeVWL)
Finds listed real estate vehicles too volatile
Separate accounts, joint ventures and clubs

Assets under management at the German pension fund for doctors in the Westphalia and Lippe region are still growing. This fact - combined with a 20% real estate allocation target - means Ärzteversorgung Westfalen-Lippe (AeVWL) is always looking for new property investments, says Marian Berneburg, portfolio manager for indirect real estate.

"This is even more so," he says, "as in the wake of the global financial crisis AeVWL has decided to reduce its exposure to standard asset classes being traded on the financial markets in favour of more alternative investment forms, real estate being one of them. Naturally, part of AeVWL's appetite for new real estate investments has to be satisfied through indirect vehicles such as real estate funds.

"Whereas before the global economic crisis, AeVWL's target portfolio was the initial driver in the selection of real estate investments, today we are following a clear bottom-up approach.

"Naturally, we stay within the bounds of our medium-term target portfolio, but choosing an investment is not driven by white spots in the portfolio, but rather by micro-market and asset-level arguments," Berneburg says.

But generally, the chances are that most strategies the fund likes will follow very specific guidelines, he explains. They will probably be highly focused in terms of region, asset type and risk structure.

"We would be looking for more niche strategies," he adds.

Over the past three years, the fund has changed course somewhat. It has just liquidated its global listed real estate mandate, after deciding that listed real estate is just too volatile for its requirements.

"Rather than investing indirectly we are increasingly moving closer to real estate assets," he explains.

"Whereas this does not necessarily mean that our direct holdings increase, we are mainly focusing on separate accounts, which are being controlled and managed in collaboration between AeVWL and a specialised manager for the strategy at hand."

In cases where separate accounts are not feasible in terms of economy of scale, AeVWL is increasingly considering joint ventures, club deals and co-investments, Berneburg says.

Jan Østergaard
Industriens Pension
Steering clear of new commitments
Focused on value-added and opportunistic strategies

It's all change at Denmark's Industriens Pension, as the labour-market pension fund continues with the transformation to a life-cycle unit-link scheme - away from the traditional with-profits guaranteed pension it has long been.

The DKK101bn (€13.6bn) fund is not thinking about adding any new investments to its property portfolio at the moment.

Chief investment officer Jan Østergaard says: "We do have a small exposure to real estate via funds, less than 2% of assets under management, but currently we are not doing new commitments."

Underlying investments in the pension scheme's property fund holdings include properties within the commercial and residential sectors, as well as development land.
The pension fund maintains a strategic allocation to real estate of 2.5% with room for manoeuvre of 0.5% either way. But at the end of last year, the property exposure stood at just 1.9% of actively managed assets - low in comparison with the strategic asset allocation.

In January of this year, Industriens Pension had DKK1.79bn in real estate investment, its overall level of property exposure having increased from DKK1.16bn at the end of 2010.
Property has contributed well to investment profits at the pension fund in 2011, with holdings in the asset class ending the year with a 9.8% return, beating the benchmark return of 4.5%. "We have had a preference for closed-end unlisted funds," Østergaard says.

Development has been a key element of Industriens Pension's real estate investment strategy.

"Our portfolio is focused on value-added, opportunistic strategies with the purpose of extracting additional return from the managers working with and developing the properties," he explains.

By adopting and maintaining this strategy, he says, the pension fund hopes not to have to rely too heavily on general market-value adjustments of the portfolio - for example, from interest rate increases.

When it has selected funds, Industriens Pension has considered a particular range of factors. "Track record, competences for team, team stability, investment focus, terms are all important criteria for us," Østergaard says.