Real estate poses pension funds with varying challenges. Trustees may start with a good knowledge base compared with other asset classes, while overseas markets call for investors with more external expertise. Richard Lowe talks to three funds

NAME: Brian Bailey
POSITION: Director of pensions
ORGANISATION: West Midlands Pension Fund
TOTAL ASSETS: €11.7bn
REAL ESTATE ALLOCATION: 8-10%

It is somewhat easier to build up the necessary knowledge and understanding of trustees in the area of real estate than it is with certain other asset classes, says Brian Bailey, director of pensions at the €11.7bn West Midlands Pension Fund.

The local authority UK scheme achieves most of its real estate exposure through direct investments in its domestic markets and Bailey says trustees start with a good base of knowledge, because "buildings are within everyone's normal experience".

Furthermore, some trustees will have had some form of management experience of property, such as letting or occupying, since they work for a local authority. "The concept is known and understood, which is a big advantage compared with some of the other investment products," Bailey adds.

What is more of a challenge for the trustee board is to understand the investment aspects of real estate, Bailey says, such as outlooks for different sectors and regions, how market trends follow economic cycles and, put simply, "when there are buying opportunities and not buying opportunities".

Additionally, the direct property market is not a traded market like equity markets, but is rather a more "closed circle of deals, many of them being off-market". Bailey believes one challenge is to understand certain mechanisms: "how you do deals, the chunky nature of them and the costs involved."

To aid in this respect, trustees of the West Midlands Pension Fund receive quarterly reports on property and every few years embark on visits to real assets - "to see firsthand what is being talked about in committee",

Bailey explains. Investments in overseas real estate funds are addressed more in line with private equity investments, with a separate due diligence process. But the trustees have also had to tackle the concept of property derivatives when the pension fund considered investing in a property index note.

"We had a few hours of training on understanding what a property note was, why it was being used, how the market operated and so on," Bailey says. "We then came back on another date after [the trustees] had digested it and said: are you comfortable with it?"
 

NAME: Henrik Kolind
POSITION: Head of property investments
ORGANISATION: Sampension (Kommunernes Pensionsforsikring)
TOTAL ASSETS: €12bn
REAL ESTATE ALLOCATION:  10-11%

The local governments' pension fund in Denmark, Kommunernes Pensionsforsikring (KP), was the first in the country to invest in real estate outside of its national borders, through Sampension, its asset management arm. It started in the early 1990s, investing directly in the UK market and taking advantage of the low prices at the time. It has since invested directly in the markets of Paris, Amsterdam, Brussels and Germany.

In more recent years the pension fund has built up a portfolio of non-listed real estate funds in addition to its direct investments. Today the indirect assets are actually greater than the direct ones, making up just over 50% of the total porfolio.

However, as Henrik Kolind, head of property investments at Sampension explains, it was no mean feat extending the real estate portfolio for the first time to outside of Denmark. "You have to have very good relationships with people, with very good advisers in the local markets," he says. This is not something that you can do immediately across all markets.

To gain the expertise and knowledge in the new markets, Sampension teamed up with Cushman & Wakefield to benefit from the expertise of its research department. This was initially to help with the London market, but Cushman & Wakefield subsequently advised Sampension on other European markets in which it invested.

Kolind says it helped that Sampension had "a good background" in educating internally - many of its staff already had experience of investing in equities and bonds on an international scale - but the most important thing was to work with good real estate advisers, lawyers and tax advisers in the various overseas markets.

NAME: Hans-Wilhelm Korfmacher
POSITION: Managing directorr
ORGANISATION: WPV
TOTAL ASSETS: €1.1bn
REAL ESTATE ALLOCATION: 17%

 WPV, the €1bn pension fund for chartered accountants in Germany, has been invested in real estate for approximately 10 years. The pension fund entered into the asset class later than a number of its counterparts in the country, and for this reason it does not have any direct portfolio to speak of. Instead, it has only ever invested in indirect vehicles.

When the pension fund began investing in real estate it depended much more on consultants to build up its knowledge and understanding of the European markets than it does today, explains Hans-Wilhelm Korfmacher, managing director at WPV.

"My knowledge about European markets now is on a different level than it was when I started investing in real estate 10 years ago," he says. "We need less consultants' assistance than we needed then."

But WPV is now also investing in real estate in Asia Pacific, predominantly via a fund of funds vehicle, and is looking to invest in the US in the future. The pension fund is not as familiar with these regions and so investing in these markets is likely to necessitate the use of consultants.

WPV's investment management team includes members who know more about specific asset classes than others, but Korfmacher has to make the ultimate investment decisions for all investment areas. But because the pension fund does not invest directly in real estate, he sees that the asset class is no more challenging for WPV than the likes of equities or fixed income.