Danish pension funds have reorganised to take advantage of the appetite for real estate investments. Rachel Fixsen reports

Real estate is proving ever more attractive to Danish pension funds as they compete for the best deals on the many new construction projects that are changing the Copenhagen skyline – as well as looking for opportunities abroad. Not only is the promise of stable income drawing the institutions to property but also an increasing need to diversify overall assets.

In May, Denmark’s largest commercial pension fund, PFA Pension, said it was earmarking €1-2bn for new property investments over the next five years. The new money will push up PFA Pension’s property allocation to a point where it accounts for between 5% and 10% of total assets, from its level of just over 5% now.

Although the domestic property market is key for PFA Pension, it has said most of this new investment will be spent on international opportunities.

Traditionally, Danish pension funds have chosen to direct their real estate allocations to bricks and mortar in the domestic market, with many of them full-service owners of residential blocks that give priority to scheme members as potential tenants.

Some have stepped back from this strategy as they acknowledge the financial and risk-related benefits of international diversification.

Unipension, which manages three professional pension funds, said in March it would sell its entire portfolio of Danish buildings and plough the proceeds into European and US real estate. From now on, it would invest in indirect vehicles, it said, rather than directly in the buildings themselves. The new property strategy would ensure higher long-term returns as well as better risk diversification than it was currently achieving, Unipension said.

However, a few months before, another Danish pension fund appeared to move in precisely the opposite direction. Industriens Pension, the DKK100bn (€13.4bn) labour-market scheme for industrial workers, announced in December 2012 that the time was right for it to buy Danish property. Until then, it had restricted its real estate investment to foreign markets. The fund has appointed Peter Frische in the new role of head of Danish property investments to take charge of this new strategy.

In the coming months, Industriens Pension plans to maintain its new strategic course for real estate, says CIO Jan Østergaard. “We will be continuing to invest internationally via real estate funds and to build up a portfolio of domestic properties owned directly,”
he says.

The current low level of bond yields is partly fuelling the pension fund’s heightened activity in property. “We are substituting domestic real estate and infrastructure assets for bonds because of low bond yields and likely increasing rates,” Østergaard says.

With a current allocation of DKK2.5bn, which is 2.2% of the pension fund’s total assets, Industriens Pension still has a long way to go before it meets its long-term target of a property allocation lying between 7.5% and 10%.

In February 2013, labour-market fund Sampension decided to integrate its real estate investment department into the alternatives department, after its long-time head of real estate Henrik Kolind retired.

The fund had been following a plan to build an alternatives team that worked across the different asset classes of real estate, private equity, timber and infrastructure, under the leadership of Anne Charlotte Mark as head of equities and alternatives.

Mark and her team have been building up Sampension’s allocation to property in the US over the last year. “We made our first US real estate fund commitment late in 2011 and now have commitments to three real estate funds plus a segregated mandate,” she says.

The fund will carry on looking at possible US real estate funds to invest in over the next year as well, she says. “Also, we are interested in doing direct investments in Denmark, UK and Germany,” Mark says.

Right now, Sampension has an average allocation to real estate of around 5.5% or €1.1bn in absolute terms, although Mark points out that this allocation varies across different products. Overall, the fund is planning to increase this allocation by between 1% and 2%.

PensionDanmark has been actively building up its real estate portfolio over the past year, picking large-scale developments within the greater Copenhagen area for its key investments. Recent deals include the new headquarters for contracting company NCC, which is scheduled for completion in 2015.

The fund has joined forces with other investors on many of its other major deals, notably coming together with pension heavyweights ATP and PFA to invest in the striking Portland Towers silo conversion in Copenhagen’s North Harbour area.

It collaborated with Nordea Liv & Pension and doctors’ pension fund LPK in a deal to invest in the new headquarters for Nordea Danmark in the Ørestad district of Copenhagen, and with ATP and state agency City&Port (By&Havn) to buy the UN-City development in the Danish capital.

Sampension, too, says it is open to working with other investors in joint ventures or club deals, for example.

But Mark emphasises that the fund wants to be absolutely sure in these cases that there is an alignment of interests, which she says is particularly important when things do not work out as expected.

PensionDanmark now aims to make property account for a larger part of its overall portfolio over the next few years, says head of real estate at PensionDanmark, Mogens Muff. “At the moment PensionDanmark has DKK10bn invested in real estate in Denmark, equalling 7% of the portfolio,” he says. “Our ambition is to invest DKK2bn every year until 2015, by which time real estate will account for 10% of the portfolio.”

Amid the focus in the industry on finding new investment opportunities within property, a sobering reminder came from the regulator this year that funds also need to be careful how they account for the ones they already own. Danish engineers’ pension fund ISP was told in April by the Financial Supervisory Authority that it must cut the valuations on a significant slice of its property portfolios. Six properties had been overvalued by DKK160m.

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