Emerging markets are playing an increasingly important role for Austria's APK Pensionskasse seeing a marked shift from eastern Europe to Asia in recent years. Richard Lowe reports

Austrian multi-employer pension fund, APK, has long been an investor in real estate, but for many years the Austrian pension fund's property activity was restricted to buying direct holdings in its home country. In the late 1990s, the €2.2bn fund made its foray outside Austria: a development project in neighbouring Hungary.

In more recent years APK has started to invest on an increasingly global basis. Exposure to emerging markets came initially in the form of central & eastern Europe, focusing mainly on those markets close to Austria like Hungary. Today, APK is seeing more opportunities in Asia Pacific and the pension fund is invested in a number of Asia funds and a global fund with an allocation to the region.

Senior investment manager Manfred Brenner explains that emerging markets are becoming "increasingly important" for APK's real estate portfolio. But the focus of APK's emerging markets strategy is shifting from eastern Europe to Asia. The overall portfolio is currently split roughly 50/50 between Europe and the rest of the world, with Asia now accounting for 70% of the latter and the US making up the balance. The US exposure comes mainly from investments pursuing distressed opportunities, but even these are beginning to invest in Asia as well.

"We are now, since the last two or three years, definitely seeing more chances in Asia than in eastern Europe, for example," Brenner says. "We sold most of our eastern Europe positions and we are just holding some direct investments in eastern Europe now. So, we moved our risk exposure more to Asia."

When APK defines its risk, it pays attention to regional currency, inflation and interest risks. This partly explains why the pension fund sees what Brenner describes as more of a chance for a "better risk-return profile" in the Asian markets compared with eastern Europe.

Brenner points out that if valuations come down in the latter, this could well change. "We could switch again to eastern Europe," he says, hypothetically. "But currently most of our focus is on Asia, with just a small extension to eastern Europe."

APK's Asian investments have tended towards a pan-regional/ex-Japanese strategy, but its non-listed funds are now beginning to increase their weightings to Japan. APK's Asian portfolio also includes a modest but meaningful exposure to China, both in the office and residential sectors.

Brenner suggests that, while APK does not want to take too much China-specific risk in its Asian investments, it seeks an exposure that will have a perceptible impact. "It does not make sense to invest in Chinese real estate without its having any effect on the portfolio," he says.

APK is concentrating on Asia for the medium-term. Latin America could potentially make it on to the real estate radar in the future but, for the moment, the pension fund's only exposure to the economies of this region are through commodity investments.
This is unlikely to change any time soon. "We would definitely have to do more research on it," Brenner says.

Russia and Turkey - two other increasingly popular emerging real estate markets - are similarly on the fringes of APK's investment universe.
"We are not feeling comfortable currently with Russian or Turkish real estate," he adds.