SWEDEN - Real estate investors should consider agricultural real estate investments as a way of diversifying, the chief investment officer of AP2 has argued.
The scheme, which recently announced returns of 11% - with 5% of its SEK222.5bn (€245.7bn) invested in real estate - currently seeks the majority of its real estate exposure from domestic properties due to complications of overseas investments, but has recently gained exposure to agricultural land.
Hans Fahlin said a wish to offset AP2's high equity risk drove it into the new asset class, as well as investments in timberland.
"We are required to have a fairly high level of real return, so it was natural to think about real assets," he said.
"Where could we invest in real assets that were, for example, different from the Swedish real estate holdings we already had?"
Fahlin added that while they were content with the returns gained from the real estate portfolio, it was concentrated mostly on the Swedish market, as he viewed overseas fund opportunities as expensive and not in line with the scheme's long-term investment ethos.
"There are lots of real estate funds that tend to have, beside a non-negligible cost, usually much shorter time horizons," he said.
He said AP2 wanted its real estate holdings to be longer term and more focused on yield than price appreciation.
"Where we are looking to diversify conventional real estate," he said, contrasting its conventional assets with the agricultural investments, "we are paying much attention to the manner in which we can do this. This has to be aligned with our objectives."
He also praised other benefits of the asset class, saying that as a liquid investor, AP2 stood to gain from the risk premiums offered for investing in such an illiquid asset.
However, he said that the scheme's investment in agricultural real estate was not an effort to offset climate change risk.
A recent study by Mercer recommended the asset class as a way of offsetting climate change volatility in portfolios, predicting it would soon account for 10% of all portfolio risk.