Institutional allocations continue to rise in the Nordics. But Rachel Fixsen finds a number of individual growth stories within each region

The flow of capital from Nordic institutional investors into real estate shows no sign of abating.

A host of factors, such as rock-bottom interest rates and growing pension contributions, have combined to point pension funds and other institutions in the direction of property.

According to the investors, the only dam keeping the flow in check is the amount of suitable investment opportunities available.

Rik Eertink, head of Nordics at CBRE Global Investors has observed how Nordic institutional investors have been increasing their allocations to real estate in recent years. “The main drivers for this are the low bond yield levels that have made the institutions chase higher returns that can be found within the real estate market,” he says. “This flow of Nordic institutional money has affected the supply of equity and this, combined with financing made more readily available, has led to a highly competitive market for assets.”

Eertink says Nordic investors are becoming more active in real estate, but says many of them are proving to be risk averse. “Within the Nordic property markets it is very clear that prime office property is by far the preferred investment type, and the fierce competition for these assets has pushed down yields to historically low levels,” he says. “Geographically, office assets in Stockholm, Malmö, Gothenburg and the capitals in the other Nordic countries are the most sought-after areas.” 

Norges Bank: innovation needed to meet target

Norway’s huge Government Pension Fund Global, managed by Norges Bank Investment Management (NBIM), has deployed around NOK63bn (€7.8bn) in real estate investments since early 2010, when it was given permission by the Norwegian government to branch out into the asset class.

At the end of June this year, the fund had 1.2% of assets invested in property –  still a far cry from its 5% target allocation. 

NBIM has not set a deadline for reaching 5%, but according to its 2014-16 strategy plan it expects to invest 1% of the fund in each of the next three years in the private real estate markets.

“Our real estate investments to date have primarily been implemented through joint-venture agreements,” a spokesman explains, citing the strategy plan.

But sticking to this type of investment model alone may not allow the fund to expand its property allocation as extensively as it intends. “We will prepare the organisation for management of fully-owned properties and a more active role in the development of our properties,” the spokesman says. 

NBIM will also consider investing via larger ownership stakes in listed real estate companies and public-to-private transactions, he says. The aim, according to NBIM, is to build a global but concentrated real estate portfolio. 

The strategy will focus its property investments in a limited number of large global cities in which it will invest in core retail and office properties. 

In the US, investments will be concentrated in New York, Washington DC, Boston and San Francisco, while in Europe the fund will “selectively extend” investments outside London and Paris.

“In the course of the strategy period we will also consider investment opportunities in global cities outside Europe and the US,” NBIM says. 

“We will continue to capture globalisation through investments in global distribution networks.”

Eertink has also noticed how residential developers are acquiring secondary office properties and turning them into prime residential owner-occupier assets. Within retail, he says several Nordic institutions have preferred the indirect route via fund structures. “We have seen an increase in Nordic investors raising their allocation to funds in the US and to a lesser degree in Asia – mostly via the fund-of-funds model,” he says.

But Nordic investors have not been so active in making new investments in European property, because their European allocations are already overweight, he notes. “Some have also chosen a new investment route – for example, global direct via joint ventures with a local partner.” 

Finland’s VER yet to go stateside
Some of Finland’s large pension insurance companies have significantly increased their allocations to real estate over the past few years. As a whole, however, the country’s earnings-related pension sector has hardly changed its relative exposure to the asset class in the last four years.

According to figures from pensions alliance TELA, the biggest earnings-related pension providers’ average property allocation has remained around 12% since 2010. Within that average, however, Etera’s allocation has risen to 17.4% from 14.2%, and the State Pension Fund’s (VER) allocation has increased from 2.1% to 2.9%.

VER has a lower allocation to property than other pensions institutions in Finland because — unlike many of its counterparts — it invests only indirectly in the real estate market, using unlisted property funds, explains, Johannes Edgren, portfolio manager at the €17bn fund. Most of the fund’s investments are in Europe, but it has also invested in Asia, he says.

While the allocation is likely to stay at its current level or increase slightly, VER has a continual appetite for property. “We are constantly looking for new investments,” Edgren says. “Investing in Finland and Europe is always going to be the major part of the portfolio, but we are invested in Asia and will continue to invest there.”

VER is also able to invest in North America, although it has not done so yet. Most of VER’s property investments are within the commercial sector, though some of its Finnish investments are residential.

The rationale for including property in the asset mix has, for VER, always been about the benefits of diversifying out of equities and fixed income. “In the current market, the income return from real estate is looking more attractive,” especially for higher yielding parts of the market, particularly within industrial property, Edgren says. 

AMF sees double in Sweden
Swedish occupational pensions provider AMF has almost doubled its real estate allocation over the past few years, with property accounting for 13% of its total assets of SEK386bn (€42bn) at the end of June. Back in 2010, AMF’s property allocation was between 6% and 7%.

The pension fund has been putting more into property – as well as equities – mainly to compensate for the weakening of returns from the main part of the fund’s portfolio, which is invested in bonds, explains Martin Tufvesson, deputy managing director of the pension fund’s property arm AMF Fastigheter. But it still has further to go before it reaches the current 15% target for property.

While real estate investment expansion is to continue, Tufvesson says this is unlikely to happen at the pace seen so far.

Around two-thirds of AMF’s real estate investments are in its core commercial portfolio, structured as the wholly-owned subsidiary AMF Properties. The portfolio holds properties in the greater Stockholm area in the office and retail sectors. 

The remaining third of AMF’s property exposure is held within its joint venture with state pensions buffer fund AP4 – Rikshem – which was launched in 2011. AMF’s 50% stake in Rikshem now corresponds to real estate assets of SEK11bn.

Are there enough available property investments for AMF to increase its allocation as planned? Supply is a problem, Tufvesson admits.

“The market is quite sharp, with both Swedish institutions and property companies targeting investments,” he says. “Pricing is very sharp and yields are decreasing. We are more interested now in adding some diversification to our portfolio,” he says, suggesting AMF could go into Nordic property asset classes other than central business district offices. “We could, for example, go outside Sweden. We could investigate Finland and Norway, either by ourselves or with a partner,” he says.

Edgren believes the supply of real estate investments has improved recently, and that VER is looking at different ways to invest. “We’ve also been more proactive in looking at clubs and tailor-made funds,” he says. 

PensionDanmark and ATP target growth
In Denmark, PensionDanmark has been actively adding to its real estate portfolio, although it sold off its entire residential property portfolio in June to take profits. The sale of the portfolio to Nordic Real Estate Partners, which consisted of more than 700 apartments in Copenhagen, was aimed at allowing the pension fund to develop new residential projects without exceeding its allocation to residential.

One if its first projects is to build 500-600 residential properties in the Islands Brygge district.

Sweden overhauls AP funds

The big structural changes in store for Sweden’s AP pension buffer funds over the next few years will affect many parts of the funds, including their real estate investments.

In March, the cross-party pension group accepted many of the recommendations from the 2012 inquiry into the system. Two of the five funds – AP1, AP2, AP3, AP4 and AP6 – will be closed and their assets merged into larger portfolios. The overhaul also concerns investment strategy and governance. A further review will decide which two funds to wind up.

“Basically it’s business as usual,” says Magnus Eriksson, deputy CEO and CIO of AP4. “But the closer we get to the point at which it will happen, you could say that we will become reluctant to enter into long-term commitments.”

Anders Strömblad, head of external management at AP2, says the fund is also carrying on as normal. “We are continuing with our strategy and then we will see what will happen,” he says. “We will do the best for the pensioners and see the results coming out of that consultation.”

There is a real estate investment vehicle that seems to have been tailor-made to accommodate the upcoming merger of AP funds: Vasakronan, the SEK89bn company owned jointly by four of the funds (AP1 to AP4).

AP4 itself has 5.5% of assets invested in property, giving it an underlying exposure of 13%. The allocation has been expanding in recent years, Eriksson says, although the number, as such, is not so important for the pension fund. “We do not take an overall decision saying we have a target allocation,” he says. “For us, it is much more a case of what business opportunities we can find and especially the people we can find to manage the assets.”

AP2’s real estate exposure has increased to almost 9% from about 5% in 2008-09, according to Strömblad. When all commitments are paid, the exposure will be nearly 10% – and at the target level set in 2008-09, he says.

“So this year we have set a new target to move that to 15%,” he says, adding that the challenge is always to find good investment opportunities. 

“We don’t move our asset allocation until we have the right investments in our portfolio.”

Two-thirds of the target allocation will be in conventional office properties and the remaining third in farmland and timberland – already a significant part of AP2’s property exposure, he says.

Geographically, the property exposure will take on a broader spread. 

It is currently invested mainly in Sweden but has investments in London and in some cities in Germany, too. Strömblad says the fund is also looking at Paris.

As things stand, PensionDanmark has around 6% of total assets invested in real estate, but it aims to boost this to 10%. To do so, the pension fund plans to add DKK2bn (€286.7m) of property investments each year, targeting core real estate, mainly within Denmark as well as in the rest of Scandinavia.

Danish pension fund ATP has said it will increase its exposure to real assets because of the stable, long-term income streams they can provide. It has created room to do this by making big changes to its liability structure.

In August it shortened the duration of its yield guarantees to scheme members and during the previous autumn it reduced its interest-rate sensitivity by 25% by implementing a new discount yield curve to calculate liabilities. Both moves effectively made the pension fund less dependent on very long bonds as a means of achieving returns.

The fund has made several big property deals this year, notably buying a large office property in Brussels in May for DKK3.2bn that was let long-term to the Belgian ministry of finance. 

Like other Nordic investors looking for property investments, however, ATP emphasises it will only sign deals where the price is right.

Investor Universe - Nordics: Northerly winds of change