The real estate exposure of Austrian pension funds has increased over the past few years, but it might have reached a ceiling for now. They have ventured far enough to avoid confined or crowded markets, Barbara Ottawa finds

At the beginning of 2008 the 17 pension funds in Austria had around 1.97% in real estate on average; by year-end 2010 this had risen to 2.94%, according to data collected by the financial services provider Österreichische Kontrollbank (OeKB).

The Siemens Pensionskasse has increased its real estate exposure over the past year from around 6% to 10%. "This is our target allocation," confirms Stefan Eberhartinger, head of the €720m company pension fund for Siemens Austria.

Among the 11 company pension schemes his Pensionskasse has one of the highest real estate exposures and the average for these funds is only just over 1%. "We are quite content with the investments and real estate returned 3.8% last year with a target return of 4% - this is especially pleasing as a lot of the money used for the investments was taken from our cash or fixed-income holdings," explains Eberhartinger.

The largest Pensionskasse in the Austrian system, the €4.7bn multi-employer pension fund VBV, has also increased its property exposure over the past year to 7%.

"Not much is planned for this year; we have reached our quota, which is a balance between what is necessary to achieve returns and the amount of illiquidity the portfolios can take," explains VBV CIO Günther Schiendl.

Christian Böhm, head of the €2.7bn APK multi-employer fund, is only adding real estate opportunistically. "We do not want to buy to fill a quota - but over the long term a real estate exposure of between 5% and 10% makes sense for a pension fund," he points out.

At the moment APK has around 5% in real estate on average over all its so-called investment and risk communities (VRG), which every Austrian pension fund has to set up for its clients according to their risk profile.

"We are cautiously building our property portfolio as timing is very important," Böhm explains.

An increase in interest in real estate is also confirmed by Peter Karl, managing director at the Austrian Erste Immobilien KAG. "There is more interest by pension funds in real estate because other asset classes are more volatile," he points out.

His company is currently testing the waters for the launch of an institutional real estate fund and Karl sees "some interest" in the product from pension funds. He is surprised that pension funds are not focused on a particular region. "There is a lot of flexibility and we would have expected much narrower geographical confinements from the investors."

Particularly, he is pleased that Austrian pension funds - unlike their local retail colleagues - are not shying away from central and eastern European (CEE) investments and were not scared off by corrections in the market. "CEE is important for the Austrian financial system and we do see opportunities in these property markets," Karl confirmed.
Other Austrian real estate companies are also advising purchases in this region. But Manfred Wiltschnigg, board member at the Immofinanz Group, has warned that bubbles might already be forming in Warsaw, Prague and Moscow where a very small number of interesting objects is sought by a large number of investors.

Like many Austrian Pensions-kassen, APK is mainly invested in and around Austria, focusing on Germany and CEE with a few diversifications globally.

For Böhm stable returns of 6-8% from office investments in neighbouring countries in which yields had been 12% are "still ok".

The Siemens fund is also mainly invested in Germany, another part in France and in some Scandinavian property, with "a bit of UK" sprinkled in and "very little Asia" for diversification.

Last year, VBV made its first foray into the Scandinavian property market, not only because it is an interesting market from a real estate perspective but because this investment also helps the fund diversify its whole portfolio regionally as very few other asset classes are covering this part of Europe.

The pension fund also has a few satellite investments in Asia but "no US". Schiendl explains that after the crisis Germany, Austria and Switzerland were cheap - "so why go any further".

Böhm believes Austria has very few opportunities as the market for institutional investors is in fact confined to Vienna where offices are still being built.

Nursing homes are also coming into consideration. Last year, VBV made its first investment in the sector via a fund with German privately run nursing homes. "We are now collecting some experience in this market and building competences and maybe Austria [where the market is mainly state-run] will be interesting in the future as well," says Schiendl.

Another possible future diversification strategy for VBV is shopping centres, something which Eberhartinger is also looking into for his fund. Tradtionally residential has been of little interest to Austrian pension funds because of low returns. But Siemens Pensionskasse has bucked the trend and finally made a 2% investment in residential property - a sector that other competitors have little interest in because of the low returns. "We had been looking for a good residential investment for years and now we were able to buy into a close-end fund for German and a bit of French housing," Eberhartinger explains. Other products he has been looking at are mostly residential projects that are still under construction or without tenants.

"This sector is a very good inflation hedge, even better than the rest of the property portfolio," Eberhartinger is convinced. But for this year the Siemens Pensionskasse is not planning any more major real estate investments. "For us the property portfolio is about long-term buy and hold," says Eberhartinger.

In fact, the only changes to the portfolio this year will be from a former open property fund in Germany which had to close in the wake of the crisis and from which the Siemens Pensionskasse is waiting to be able to divest. "But this makes up less than 1% of our property portfolio," Eberhartinger notes.

Eberhartinger is not concerned about the new regulations regarding German open-property funds. Following liquidity issues in some of the funds the German government had introduced longer notice periods for larger withdrawals. "We already have such agreements in institutional share classes within a fund," he points out.
However, unlike the agreements in Austria, the new legal requirements in Germany are binding.