Dutch pension funds pioneered international investment. Today they are emerging from a period of re-evaluation with sights set on firm goals for their RE portfolios. Richard Lowe investigates

If the first phase of the financial crisis was remembered as an ongoing state of shock for real estate investors, and the subsequent passage represented a collective pause for breath and re-evaluation on the sidelines, the latest phase seems to be one of cautious and selective re-emergence onto the playing field. This is probably an adequate description for European pension funds by and large, but is particularly apt for the Dutch market.

It certainly mirrors the experience of APG Asset Management, the wholly-owned fund manager of the Netherland's largest pension fund ABP. "We have been virtually out of the market in 2008 and 2009," says Robert-Jan Foortse, head of non-listed European property investments at APG. "Towards the end of 2009 we started to investigate markets and to start looking to invest again, which has resulted in some investments made earlier this year."

The largest and most high profile deal in 2010 was the acquisition of Cap 3000, a Nice shopping centre, for €450m. The asset was acquired in a three-way joint venture with Crédit Agricole Assurances's subsidiary Predica and shopping centre operator Altera, which will become the asset manager of the centre.

Foortse describes the deal as the closest APG will come to making a direct investment. In fact, APG was not completely inactive during the 2008-09 period - it made one similar deal in the summer of 2008. It acquired Scandinavia's largest shopping centre owner and developer, Steen & Strøm, via a joint venture with France's Klepierre.

"We team up with a company in which we already have an investment and acquire either a platform or a very special asset. In a sense, it is a co-investment alongside an investment we already have," Foortse says. "We are definitely interested in more of these types of deals in this market, because we think it strengthens our current investments."

Back in April 2009, Roderick Munsters - then chief investment officer for APG - told a conference audience that the organisation was looking for deals with smaller groups of "like-minded investors" - in other words, at the opposite end of the spectrum to pooled funds with large, anonymous investor bases. The Cap 3000 deal is certainly in keeping with this outline.

This sentiment still holds true at APG. "We definitely would like that," Foortse says. "It's one of the lessons learned over the last few years that we like a bit more control. It's also a lesson learned that if you are in these vehicles with a large number of investors, it's hard to mend or solve issues which may arise in a fund."

However, Foortse also believes the move by APG and other large investors towards joint ventures and club deals may be a "function of the market" more than anything else. "At this moment I see some large investors actively looking to invest. I have not come across too many of the smaller international investors that are back in the market already. I think they will be shortly, but I haven't seen too many around at the moment," he says. "So, yes it's a push, we really like it, and on the other hand, I don't think that there are too many other investors around at the moment."

The €1bn De Eendragt (a Dutch pension fund-turned insurance company) has been active: it recently acquired a stake in pan-euro-zone shopping centre fund. De Eendragt is actually in the process of reducing its exposure to real estate, which currently represents 50% of its investment portfolio, which is separate to its liability-matching portfolio. Chief executive Philip Menco explains that the move is partly down to the characteristics of the asset class, but also due to the denominator effect of recent years, whereby De Eendragt's real estate exposure rose above its the long-term target as other asset classes lost market value.

De Eendragt has been more active as a seller of real estate over the past two years as it looks to divest some of its holdings in Dutch real estate funds with a view to increasing its international diversification. Last year it sold a Dutch residential fund and it would like to sell some of its exposure to Dutch offices, although there is still a bid-ask spread in this sector. "If we can find a buyer, we'd love to sell another part of the portfolio this year," Menco says. "But we are not in an extreme hurry. We are not distressed or in a situation where we need to sell."

Recent divestments allowed De Eendragt to make a rather opportunistic investment in the aforementioned shopping centre fund via the secondary market. "Normally we prefer core with a low leverage," he says. In this case De Eendragt was able to buy into the fund at a point when most of the initial investment costs had been paid for, generating what is hoped to be an additional 3% for the next four years. "We know the asset manager very well, since we do have another investment with them," Menco says. "Therefore, we see this as an interesting opportunity."

In terms of new investments, De Eendragt is negative on countries with a weak economic future or with a lot of currency risk from a euro-denominated point of view. It has a significant stake in a core pan-European fund. Menco sits on its advisory board and has decided not to invest in Spain or UK. "We had some long discussions about investing in Spain and investing in the UK," Menco says. "For totally different reasons the management was advised not to do that. Spain was simply the case that the prospects were not good from a purely economic point of view, even with very depressed real estate prices."

There were a number of different drivers regarding the UK: the board agreed there was a risk that the current market recovery could be temporary; the risk sterling currency risk was high, and investors that specifically wanted an investment in the UK had sufficient opportunities to buy a specific UK-only fund.

"So our preference is for the stronger countries both economically speaking and also in terms of future currency risk," Menco says.

BPF Bouw, the pension fund for Dutch construction workers, is also looking to reduce its real estate weighting to the Dutch market in favour of a more internationally diversified exposure. However, the third largest pension fund in the Netherlands is seeking to do this by diluting its stake in direct Dutch holdings rather than actually selling buildings. Its portfolio of Dutch office, retail and residential buildings will be placed into three funds, which other pension funds can then invest in. This capital will be reinvested by BPF Bouw into global real estate funds.

BPF Bouw has a very high strategic allocation to real estate compared with its peers in the Netherlands, although this is more understandable when you consider its membership's profession. Dick van Hal, chief executive of Bouwinvest, the real estate investment arm of BPF Bouw, says the pension fund is happy to maintain its high exposure to the asset class, but only if risk is reduced by diversifying away from its large Dutch portfolio. Dutch investments currently represent 80% of the real estate portfolio; the pension fund wants to reduce this to 60%.

BPF Bouw wants to make the transition with a four to five-year time period, but Van Hal says the pension fund will not be rushed into making new international investments. "The markets are very volatile nowadays in, for example, Spain and the other South European countries where we have little interest at this moment. From a point of diversification we intend to invest there but we are waiting until the current dangers are over," Van Hal says. "If it is too dangerous to enter some markets we will not do that."

BPF Bouw will build up its exposure in Europe, Asia and the US, although it will target core assets, "high direct returns" and low leverage. "We are looking - as many other pension funds - for a low risk-return profile and not for a lot of adventure," he says.
MN Services, the asset manager of a number of Dutch pension funds, including PMT, has more than €1bn in uncommitted capital to real estate funds, and fund managers have in the last few months started to make capital calls as they have seen opportunities start to arise. Many of these funds were originally intended to wind up between 2008 and 2010, but this has been deferred.

"That means we have new investments, we are adding value via refurbishment and redevelopment," says Richard van Ovost, head of global real estate investments at MN Services. "We've picked it up where we left it at the end of 2008."

MN Services and its pension fund clients certainly have an appetite to make new investments in 2010 via its existing fund managers, but managers and placement agents will find it tough to raise new capital.

"If I talk to investment agents, they have brilliant ideas but most of those ideas are also pursued by our existing managers," Van Ovost says. "That means they think our reserves of our respective clients don't have any appetite to invest. Well they do have appetite, but we already have that appetite in the existing funds."

Herman Gelauff, global real estate strategist at MN Services, adds that the asset manager has not completely closed its mind to new fund managers. "We speak to them, we see them and we ask ourselves, is it adding value to the existing portfolios? That is the main question. If it's not adding anything, why should you pursue," he says.

Van Ovost expects the situation will be resolved in part by a shakeout in the investment management industry. He also wonders what will happen to the fund placement industry as investors move more to long-term relationships with fund managers, and also possibly look increasingly at different investment structures, such as joint ventures and club deals. He sees a growing trend towards club deals - funds with shorter life spans and with a smaller pool of like-minded investors - and separate accounts, somewhat echoing the view of APG.

Anna Jaworska, real estate research manager at Blue Sky Group, the asset manager for the KLM pension funds, and a number of Dutch schemes, believes the real estate investment industry will emerge from the crisis ultimately stronger. "It's very important that lessons learned in the last few years should not be forgotten and should be used by the industry as a catalyst for further improvement in real estate as an asset class, to really reassess the models and improve the transparency," she says.

Last year, Blue Sky undertook a real estate diversification study in order to develop a long-term strategy for pension fund clients' portfolios. One conclusion was to build an exposure to the real estate markets in Asia-Pacific, alongside Blue Sky's investments in Europe and the US. Another was to decrease its weighting to listed real estate for the long term from 40% to 30%. Jaworska says the latter was due to its "close correlation with equities in the short term". She adds: "We are confident that we still have a liquidity buffer in the portfolio, while we are limiting the short-term fluctuation of the listed sector."

Blue Sky also reassessed allocation levels to real estate. It concluded that strategic allocation levels should remain the same. "Real estate is in the long term a good diversifier to the portfolio and it is not substantially correlated with other asset classes, so it is a very good added value to the portfolio itself," Jaworska explains.

"Another thing is that there is a stable income stream from real estate, which forms a base for the income portfolio, aiming to provide a stable cash flow. And there is an additional part to that - a kind of return portfolio where you can add or improve performance of the asset class and the investment portfolio as a whole".

While Dutch pension funds might have committed less capital to real estate investments over the past two years than they had in previous years, it does not mean they have been inactive in relation to the asset class. "Our pension funds are actively looking at the investment opportunities," she says. "However, they are more conscious when making the decisions. There is much more comprehensive and detailed due diligence process, which lengthens the fund selection process these days.

"I think most investors have already incorporated into their due diligence processes the lessons learned from the last two years and therefore they have much more conservative approach towards leverage and they have more demands with regard to corporate governance and alignment of interest," Jaworska says. "It's not that the pension funds are not acting, but it is more that it is all taking much more time."