Pension funds returned from the sidelines in 2010 and began making new investments. As Richard Lowe discovered, for many this has meant new allocations to US real estate

Denmark's largest pension fund, ATP, acquired a high-profile office building in central Copenhagen, let in part to the Danish government. It was one of the more notable deals in the Danish commercial property market recently, but was perhaps even more significant for being ATP's first direct acquisition in Denmark for nearly two years.

That ATP has come back from the sidelines and committed capital to the market reflects a wider picture among Danish pension funds, and one that not only applies to their domestic property market. ATP has also recently committed capital to three non-listed real estate funds, all targeting core real estate in the US.

ATP, along with a number of other Danish pension funds, has identified the US as a good market in which to increase exposure at the current point in the global cycle. ATP has spent the past 12 months undertaking due diligence on the three funds, which could not yet be named. "We have been rather active in the core US space," says Michael Nielsen, managing partner at ATP Real Estate, which manages ATP's indirect property investments.

The picture for Sampension, the management company for three Danish pension funds, is strikingly similar. It too has not been very active over the past two years in terms of making new investments (the last significant investment was in 2008 when it entered into a forward purchase agreement to acquire a new office development in Bristol in the UK), and spent much of the period between 2006 and 2008 selling direct and indirect assets in Denmark, the UK and Belgium. But today it is also very much intent on investing in the US.

"That doesn't mean we haven't been very active developing our strategy," says Henrik Kolind, head of property investments at Sampension. "We have been focusing on the US market where we first looked at the listed REIT market, seeing how it developed. Now we are looking into the more core part of the US market, where we think there could be some opportunities in the open-ended funds."

He adds: "We are very much in favour of the residential multi-family market. We think that might be the first to show the way out of the crisis in the US. The interest for going into this market will be greater than it has been."

Luca Giangolini, partner and head of corporate finance for Cushman & Wakefield's capital markets group, says there was a definite pause among Danish pension funds when it came to making new investments - as there was with institutional investors across Europe - however, in 2010 there were some new allocations as investors began to look beyond just monitoring existing investments.

"2008 and 2009 was about managing existing funds or investments, and perhaps keeping capital aside to work with managers to resolve any banking issues that might have come about," he says. "Frankly, the situation was probably healthier than many had anticipated, and less capital was actually required, so we started to see some of that unspent capital being allocated to new vehicles."

AP Pension was returned to the market during the last 12 months. "I would say we have been pretty active," says Peter Olsson, head of property at the pension fund. "We have investments in the UK and have expanded our investment during the summer."

AP Pension committed to two funds targeting UK real estate during the past 12 months, including Rockspring Property Investment Managers' latest vehicle. The pension fund has also made some direct investments in the Danish market.

But while AP Pension has been on the lookout for new investment opportunities, much of the pension fund's resources have been taken up in dealing with existing investing investments. "We are spending a lot of time on the existing funds in our portfolio," Olsson says, "to get up to speed on the funds, to see what they are doing and to question if they are doing things the best way."

Olsson's experience of how fund managers have responded to the downturn, in terms of managing leverage and occupancy rates, has been somewhat varied. "Some have seen that it is something they should devote more time to," he says. "Some are learning a little bit faster than others, but I think they understand that if they should raise money for new funds in the future they should really address these questions from existing investors."

When it comes to making new investments, Olsson says he is happy to bide his time and find the right opportunities. "We are active, we are looking, but we are not under pressure to invest a certain amount of capital," he says. "I see a lot of opportunities but I don't know how attractive they. Managers are still there in the market and still eager to raise capital, but I also see they are having difficulties in raising capital."

He adds: "We are very opportunistic and deal-driven in relation to what we see at the macro level. We try to spot the best available manager in that market. It is not like we have a fixed allocation for different parts of the world."

Daniel Voss, portfolio manager at PenSam, describes the pension fund's recent real estate investment activity as "relatively modest".

The two principal activities PenSam has undertaken over the past 12 months is to commit capital to a global fund of funds vehicle managed by Sparinvest Property Investors and to acquire some interests in core European open-ended funds.

Voss expects activity to continue picking up and like other Danish pension funds is particularly interested in what opportunities might arise in the US real estate markets. "It seems to be a market that is generally in focus, and understandably so. It's gone through a tough spot and yields are now relatively attractive," he says. "If you compare it to bond deals - certainly, interest rates generally - it seems like a reasonable proposal."

PenSam was one of four institutional investors to commit to the fund of funds vehicle Sparinvest Property Fund II, which achieved its first closing with more than €100m at the back end of 2009. Sparinvest hopes to raise as much for this fund as it did for its predecessor (€480m), but managing partner Bo Jensen admits it has been a tough market for capital raising.

"If you go back a year in the market, people were scared of everything," he says. "Then things improved during the spring and are still improving." But he says uncertainty over incoming Solvency II regulations for insurance companies has not helped, and he admits that many investors seek the reassurance of seeing other investors committing capital to funds before they do.

PenSam's real estate portfolio comprises roughly €4bn of directly held Danish real estate and €1bn in indirect international holdings. The latter has been built up through investing in funds and fund of funds vehicles, such as Sparinvest's latest global product.

PenSam and Sampension, along with other Danish pension funds, including FSP, PKA and PFA, are also members of the Danish Real Estate Club. The club began as a bid by five pension funds to build up a foreign real estate exposure, primarily in Europe, but has broadened into a professional network with global ambitions. Any number of members can pool their due diligence resources and capital if they identify particular opportunities in which they share an interest.

However, the slowdown in activity since the crisis has meant the club also has become dormant. There are no plans on the table for any joint ventures but it is expected that the club will again become active in the future.

"I think it has been the same situation for other Danish investors. It has been very calm and there has been lower activity over the last couple of years," says Kolind. "When we start up again we will of course see if we can find something to do together and do the due diligence. But for the moment it has been quiet."

Voss adds: "We are still active in the sense that we exchange experiences. If anything does crop up that several members want to pursue, I think we would opt in and share costs."

In terms of club deals more generally, there has been talk about larger investors moving away from traditional funds in favour of investing with a smaller number of like-minded investors. Voss says, whether this actually becomes a trend is still "open to be seen". But he believes the traditional fund model, while not always ideal, still has a role to play for investors.

Olsson believes that club deals do not provide as simple a solution to the problems associated with real estate funds as some would suggest. He says such club deals are still essentially the same set-up just with a smaller number of investors. "I think you will see more club-type funds, because I can see it is more difficult for the funds to raise the same amount of commitments as they did a few years ago," he says. "So they may just have to settle for fewer investors."

The domestic market
A number of large Danish pension funds have significant direct real estate portfolios in their domestic market. The benign conditions of the Danish real estate market compared with other more volatile ones across Europe will have been a source of stability for them. However, this can be partly explained by a dearth of transactional activity, making it difficult to come to any concrete conclusions about its future.

Kolind notes that prime office yields today in Denmark are similar to those in the UK. "Maybe that is something to do with there not being many transactions in Denmark, so we haven't seen any big declines," he says.

Olsson adds: "Prices really haven't corrected that much, as they should have. Things are still pretty expensive in Denmark." He believes the market has a number of issues to work through, including a large number of real estate assets on bank balance sheets as developers have gone bankrupt. "So I think it is a market that is not showing its true potential really yet." For AP Pension, the domestic market has been mostly about looking after existing assets in the portfolio, which more than anything is about striving to keep tenants in place.

As mentioned, ATP's recent acquisition in Denmark was the first in approximately two years for a pension fund. Nielsen admits the pension funds been "rather passive" in Denmark up until that deal, mainly because appropriate investment opportunities have been scarce.

"There have been a lot of more secondary assets, but that is not something we will pursue," he says. "Furthermore, in the core segment Denmark has not seen the same adjustment of prices as, for example, the UK or Sweden have. So the core segment is still rather expensive in Denmark."

ATP has been active in a different vein: sustainability. "We have increased our focus on sustainability in general, meaning that it is really becoming an issue in not only our direct portfolio but also in our indirect investments," says Nielsen.

"That is something we put more and more resources into. We need to understand how our managers will deal with sustainability, and in our direct portfolio, where we can act more ourselves, we have implemented a number of sustainability policies, so it is really becoming a focus area."

Nielsen is aware of tenants - both in Denmark and internationally - stressing to landlords that they are only allowed to sign leases if they meet certain degrees of sustainability and energy efficiency. "So we believe this will be a growing trend, and definitely will be a part of our investment decision-making process," Nielsen says.