As they search for new ways to diversify their portfolios Finnish investors see opportunities in the current crisis. Rachel Fixsen reports

Finland's pension funds are still looking beyond the border - and beyond their immediate neighbours - in search of promising real estate investments, with some funds keen to add opportunistic vehicles to the property portfolio mix.

Multi-employer pension fund Tapiola has continued to diversify its real estate investments abroad by using indirect investment vehicles.

While the fund has decreased some positions in certain areas within real estate in the current year, it has has made new investment commitments in other Nordic Countries - Norway, Sweden and Denmark - as well as in some central European countries.

Tapiola's real estate investment allocation accounts for nearly €1bn, which is more than 10% of total assets. The property allocation consists of direct real estate investments in the domestic market - mainly offices and some retail - as well as exposure to European and global listed real estate, and a growing portfolio of unlisted real estate fund investments, says Tapiola director Hanna Hiidenpalo.  She would like to add more unlisted real estate funds to the portfolio, believing that they still seem to be an attractive way of getting real estate exposure abroad and add real estate correlation to the total portfolio.

"At the moment and in the longer run, retail and logistics are the preferred sectors," she adds.  

Meanwhile Finland's giant state pension fund Valtion Elakerahasto (VER) holds around 3% of its €11.7bn assets in the property market, made up solely of indirect investments.

Now the fund is targeting indirect private equity real estate funds, according to Timo Löyttyniemi, VER's managing director. "That is our main strategy," he says. Right now, the fund is focusing on Europe for real estate, and within that broad geographical target, VER aims to diversify across various segments of the market. Opportunistic funds could have a role to play too. "We have been doing it as a diversified strategy, that may include some proportion of opportunistic funds, but we will not overemphasise them," Löyttyniemi comments. Looking ahead, Löyttyniemi points to possible moves into infrastructure investment. "The future will tell, but it is certainly an interesting area," he says. In Helsinki, the Etera Mutual Pension Insurance Company has taken on some foreign indirect investments, having moved into two funds investing in St Petersburg in Russia, says Timo Sotavalta, Etera's head of real estate.

"In the EU area, we have not made any new investments. According to our analysis, the yield compression is over in Europe and so future earnings will be significantly lower than in the last few years," he says. But despite this, he insists that the fund will still keep an eye out for investment opportunities within the region. At the moment, Etera's property portfolio consists of €815m of investments, accounting for 13.2% of the pension funds' total assets.

Within its domestic property portfolio, Sotavalta says about 85% of Etera's holdings are in direct property. It is now in the process of selling one portfolio of 10 office properties.
The fund is seeking logistic, retail and residential properties. "We now have over 70% of our portfolio in offices and shopping centres in the Helsinki metropolitan area," Sotavalta explains. However, he notes that the fund has not been an active buyer in this area in the last few years, because the market has become so hot.

The €730m corporate pension fund of national airline Finnair holds around 11% of its assets in domestic real estate. "It is mostly within Finland," says chief investment officer Mika Stirkkinen. "We are an airline so our properties are around the airport area."
But he adds that on top of these direct property holdings, the pension fund also invests in three REITs, which hold global and Asian real estate. It is only in the last two years that the pension fund bought into these funds.

"Additionally, we have a couple of more opportunistic funds, of the private equity-type of real estate," he says. But getting involved in this area is a challenge for the pension fund, because of the time and resources required to research this relatively complicated type of investment.

Stirkkinen says he is more or less the sole investment expert within the fund. "I am used to private equity transactions within equities, but the real estate space is more difficult," he says, adding that the Finnair fund is unlikely to go any further down this particular route.

How do the pension funds in Finland see the credit crunch affecting real estate investment? "It's a concern," says Stirkkinen. "But on the other hand, it might be positive for some nearer transactions, in the Baltic regions, because prices will come down," he believes.

In Finland itself, there have as yet been no major effects from the credit squeeze, according to Sotavalta. "But of course the most opportunistic funds will have difficulties in the credit markets," he states. "In Finland, domestic investors have been active in recent months, and this may be a sign of a change in the market." The international credit tightening is influencing all investments areas, including property, Hiidenpalo says. "In some markets there may be some adjustments in real estate prices," she predicts. "Property is attractive but getting interesting exposures to direct real estate at reasonable prices has become more and more difficult."

She has concerns about the market's immediate prospects, but is more confident looking further ahead: "Long-term prospects for real estate are still attractive; however we are perhaps not as bullish on certain market areas as during the last few years.

"The shorter term outlook is not so bright due to rising interest rates and compelling pricing in some markets, especially the UK and some other countries as well," she remarks. Löyttyniemi says: "The turbulence in the markets will have an impact on real estate as well; it will be mainly on the financial costs embedded and the loan facilities will be a bit tighter in future." 

However, the overall interest rate has decreased, and this has compensated a bit, he notes. "At the same time, the risk premium for lending has risen by 50 basis points; the effect may be zero, but the composition has changed."

And he believes the attitude of investors is bound to be more wary. "Investors are looking more carefully at the highly leveraged products, and would rather have a more balanced structure in place." Not that this will alter VER's own strategy, he says. "We have used leverage very conservatively," he adds.