This Danish adventure into ‘club' investing has been hugely successful. However, its appeal is not universal; in some countries it might be a non-starter. Kristen Paech reports
It began as a bid by five Danish pension funds to build up a foreign real estate exposure, primarily in Europe, but the Danish Real Estate Club has blossomed into a professional network with global ambitions and strong financial bargaining power.
The club, which counts PKA, PenSam, Kommunernes (SamPension), PFA Invest International and Finanssektorens Pensionskasse (FSP) as its members, is well into its third year, and the maturity that comes with age is evident.
Its collective investment horizon has broadened, there is a greater focus on risk management and the members themselves have developed a stronger appetite for real estate investing generally.
"The club now has a much broader view of the world," says Bryan Laxton, head of UK capital markets at Cushman & Wakefield, the global real estate advisers with which the club has an investment service agreement.
"When we started the club, the UK and Europe were predominating with a small amount in Asia; now Asia is one of the main targets, along with the US. The club is much more balanced in terms of where it's looking and in my opinion can regard itself as a global player."
Cushman & Wakefield's remit is first and foremost to find attractive real estate opportunities for the club's members across a broad range of markets.
While each member invests on an individual basis, the fee arrangement means due diligence and other costs are lower for club members than would be the case if they were dealing with the firm individually.
This year alone, the club has made 10 investments worth more than €300m, an average of €30m per investment. Of those, three have been in Asia, one in the US and one in Central America.
The number of investments is currently below last year's total of 12; however, Laxton says the average size of the investment has increased.
"All of the members have seen an increased appetite for real estate," he says.
"It hasn't been discussed but I can see that over time they might begin to take an active approach and sell their smaller investments to consolidate into a smaller number of bigger investments."
When it comes to increased appetite for property, the €3bn FSP is a case in point, having nearly doubled its allocation to the asset class since joining the club three years ago.
"We have brought our exposure to real estate from roughly 8% of our assets to 14%
(€428m) due mostly to the funds we have begun looking at through the club," says Søren Schjødt-Hansen, chief investment officer at FSP.
When the club was established, FSP owned mainly direct residential real estate in Denmark, and was also a member of UK office fund Britannia Invest, alongside PKA and SamPension, which are both now members.
"We have picked a couple of broad European funds through the club which are diversified across different sectors in Europe," Schjødt-Hansen says.
"Outside of the club, we have also invested in a US real estate fund. Since we've grown our real estate assets we have become more global with respect to outside the domestic market, but we have stuck to Europe and US, and we have not yet skipped into Asia."
The €16.6bn PKA made its second US property investment through the club in July, with a US$75m (€52m) allocation to the Peter Cooper Village/Stuyvesant Town fund, launched by BlackRock and Tishman Speyer.
According to Nikolaj Stampe, head of property at PKA and the club's chairman, the initial foray into the region was in 2005 when the fund invested $50m in an income/growth fund. The real estate portfolio now totals €2bn, with €250m invested outside Denmark.
The global reach that the club has achieved through Cushman & Wakefield is perhaps its biggest selling point.
"We only pay if we use the system, which is a nice feature, but the key benefit is the club can be used to attract the best managers all over the world through the five pension funds being united," says Benny Buchardt Andersen, CIO at the €8.5bn PenSam. "We have our own strategy but we use the club to gain access to the funds and discuss possible investments in different regions, so even though we only have very few people internally we manage to get a diversified portfolio and, so far, very successful returns as well."
Michael Weischer, partner at Invensure Real Estate and former chair of the club, adds that often some of the real estate funds identified by Cushman & Wakefield fit into more than one member's strategy.
"If you can find a fund that fits into more than one strategy then you can work together and share the due diligence costs on that particular fund," he explains.
However Ubbe Strihagen, international director, Aberdeen Property Investors, believes this can also be a drawback, pointing out that there is a risk that members could follow a herd mentality.
"It is very unlikely that a lot of the institutions have or should have the same investment strategy and that the same funds would suit their strategy going forward as they're building up a portfolio," he explains. "Even though they're not sharing the same investments, and they are making their own investment decisions, they tend to be tilted towards the opportunities that the other funds are scouting for, so they are influenced by the other club members."
Nevertheless, the club is a novel initiative, making it somewhat surprising that further clubs are yet to emerge in Europe. Laxton puts this down to the subtleties among the region's pension systems: "It really depends on how the pensions industry in each country is sorted out as to whether there's going to be more ‘clubbing', as it were. In Denmark, they are all managing different types of pension funds so there is hardly any competition between them, therefore giving someone your inside leg measurement is not a particularly worrying thing to do. In the UK, where people are fiercely competitive, I can't imagine them sitting down and forming a club."
Stake and chips
On the surface, Denmark's €50bn ATP and the Netherlands' €216bn ABP might appear to be very different pension funds. One covers the pension liabilities of Dutch civil servants while the other is a flat-rate mandatory occupational scheme which provides security for employees across the labour market.
Yet despite their individuality, it is the fundamental characteristics the two schemes share that have led them to team up on real estate investments, the most recent example being a co-investment with German asset manager Patrizia Immobilien AG this year.
In addition to being the largest funds in their respective countries; they both have huge amounts of capital to deploy and both demand high standards of corporate governance and transparency.
Furthermore, they are long-term investors with an established history in real estate.
"We have similar views on important issues like, for example, alignment of interest with the asset managers, meaning that we want the managers to co-invest alongside us in the funds," says Michael Nielsen, managing director of ATP Real Estate.
Patrick Kanters, managing director real estate, Europe and Asia/Pacific at ABP, adds: "By limiting it to a small group of investors we were able to deploy a large amount of money to this investment, which is not always possible in the broader market funds."
The partnership with Patrizia will see €700m invested in German commercial property through co-investment vehicle PATROFFICE GmbH & Co KG, in which the asset manager also has an equity stake.
Nielsen believes that insisting the manager commits money to the partnership leads to better returns for all parties involved. And by setting up the co-investment in the first place, the investors have more control over which properties are purchased and the fund's overall strategy.
"When you invest in a fund with a diversified investor base you're one of many voices," explains Julian Schiller, director at Jones Lang LaSalle. "When you invest in a fund and you're one of a few investors, not only do you have greater say, if at any time the fund wishes to change its strategy or wants to do something that wasn't in the remit originally, the fund can change more quickly because fewer parties need to give their approval."
However, co-investment of this nature is not accessible to any pension fund, hence why five of Denmark's medium-sized pension funds have opted instead for a knowledge and cost-sharing approach in the form of the Danish Real Estate Club.
While club members retain their autonomy regarding individual investment decisions, the network they have created allows them to achieve economies of scale that would not otherwise be possible.
"You have to distinguish between pension funds of different sizes," says Michael Weischer, partner at Invensure Real Estate. "With co-investment, you define the mandate yourself and you are more in control of the process but it requires resources and therefore you have to be very large to do it. [Co-investors] make more investments and are more specific about their requirements - they might want a southern Italian shopping centre fund, whereas other investors might want southern European exposure and more general mandates."
The co-investment with Patrizia is not the first time ATP and ABP have worked together on property investment. Last year, the funds formed a €500m real estate joint venture called Greenhills Real Estate Limited with the management team of Hemingway Properties to acquire and operate office, industrial and mixed-use properties in the UK.
But both funds say there is no exclusivity to the partnership - indeed ABP has co-invested in hotels and resorts with the Government of Singapore (GIC), while in Finland, ATP and ABP have a club investment with Ilmarinen Mutual Insurance Company.
There are benefits and drawbacks to any form of co-investment, and the ‘right' approach is the one that best suits the individual pension funds involved. Benny Buchardt Andersen, CIO at the €8.5bn PenSam, a member of the Danish Real Estate Club, says the club's approach gives his fund the freedom to select different managers: "PenSam has chosen what we believe to be the best strategy. Other investors have done what they believe is best. It will be interesting to follow the development."
The route chosen is also linked to what the fund is trying to achieve; while the €16.6bn PKA has made a number of investments through the club, it has also created its own funds in German residential property with a Danish non-member.
"The idea of the club is to form a network, share costs and information; we might make investments in the same fund at the same time, but they are two different investments," says Nikolaj Stampe, head of property at PKA. "The solution ATP has chosen with ABP, we do that with another Danish pension fund in Germany."
For Europe's largest institutions, collaboration on real estate deals is likely to continue to be a vital part of their broader strategy. But for the small- to medium-sized pension funds, it is difficult to predict further growth in the fund of funds arena.
Schiller says: "We're seeing more and more multi-managers winning mandates and acting in this space, where they are pooling capital very successfully and negotiating on the pension funds' behalf."
He believes there will be more deals with a small number of investors, because the average amount being invested is continually increasing. However, he says collaboration may be on a less formal basis.
"In a lot of scenarios, you'll have investors that do collaborate to obtain better terms, to negotiate with a manager, to share due diligence costs, to better understand a market for example, so it does happen in an ad hoc way where investors work together," he explains.
"The likes of ATP, ABP, GIC and PGGM will always work together because they sit on advisory boards and have a good dialogue with each other; but it is certainly not
a formalised approach."