The mature, transparent market of teh UK remains key for the Universities Superannuation Scheme. But the large British institution is making cautious steps into central and eastern Europe and Asia. Richard Lowe reports
The Universities Superannuation Scheme (USS) is the second largest pension fund in the UK with some £30bn (€38bn) of assets under management, 10% of which is targeted at real estate investment. The vast majority of its portfolio is in the UK, but has been investing overseas over the last three years, including emerging markets.
Continental Europe represented the pension fund's first port of call when the decision was made to begin investing on an international basis. USS gained exposure to the emerging real estate markets of Central and Eastern Europe (CEE) in 2005 by entering into a joint venture with First Property Group. The pension fund doubled its commitments to First Property in 2007 and today gross assets under management in the region represent a market value of more than €300m.
The majority of these properties are located in Poland, a country that has been targeted by First Property for a number of reasons: a healthy macro-economic picture (high GDP growth and a controlled budget and current account deficit); consumer spending growing at 15% per annum; salaries growing at 12% per annum; and sustainable rental growth, said Graham Burnett, head of property at USS. "The managers, very much with our support, are firm believers in Poland's economic fundamentals."
Other investments have been made in continental Europe with managers such as Henderson, Pradera, AMB and Prologis. Including First Property, investments in continental Europe represent some 10% of the total portfolio value. The global liquidity crisis and the ensuing uncertainty in the market has prompted USS to sit on its hands somewhat in relation to all real estate markets, including those with strong fundamentals like Poland. "Nowhere is immune from re-pricing," Burnett said.
USS has now commenced an investment programme in Asia Pacific. Burnett describes the commitments made so far as "modest". USS has invested in two pan-Asian vehicles investing opportunistically across sectors, with a bias towards the Japanese and Chinese markets. USS worked with real estate consultants DTZ last year on putting together a strategy for Asia.
However, the modest commitments made so far need to be seen in the context of the current market environment and the uncertainty that has emerged as a result of the credit crunch.
"It hasn't been rolled out as quickly as perhaps I originally anticipated, thanks to the liquidity crisis," Burnett admits. "Although the economic fundamentals in Asia are relatively attractive, the effects of the credit crunch are nevertheless evident."
The initial intention was to look at investing in a number of country and/or sector-specific funds throughout the Asia Pacific region. But, apart from an investment made in a Japanese healthcare vehicle, Burnett revealed that it soon evolved into a more opportunistic, pan-regional approach.
Investing in funds-of-funds was one option open to USS, an approach that would have given the pension fund immediate diversification in the region. However, Burnett says the pension fund has the necessary resources to select multiple funds itself. "We are large enough to make our own decisions without having to go through the umbrella structure or the expense of a fund of funds," he says.
The process of internationalising the real estate portfolio of USS is likely to be gradual. Approximately 90% of the pension fund's real estate portfolio is located within its domestic market and Burnett emphasises that UK real estate will remain a key focus in the future, especially in the near future given the recent re-pricing in the market. Meanwhile, global emerging markets will play a comparably marginal role, albeit a growing one.
"We are at the very early stages of the programme outside Europe, taking initial baby steps," Burnett says.