MIPIM Palais 2013

The investor summit in Cannes attracts a number of large sovereign funds and pension funds. Richard Lowe speaks to two investors taking part in the discussions.

Launched in 2012, RE-Invest is a closed- door event that brings together key representatives of pension funds, sovereign wealth funds, insurance companies, family offices and other large institutional investors. The investor summit, held on the opening day of MIPIM, the week-long property convention in Cannes, France, enables some of the largest and most active global real estate investors to exchange ideas and approaches with their industry peers.

IP Real Estate, industry partner of RE-Invest, is instrumental in devising the content of the discussion topics and editor Richard Lowe is one of a number of table moderators.

This year, to reflect the increasingly holistic and international approaches being adopted by the world’s largest institutions, the theme is ‘Optimising portfolios by geography, sector and strategy’.

The theme is broken down into three sub- categories: geography looks at ‘global diversification, emerging markets, currency risks’; sector explores ‘the case for alternative property types’; and strategy covers everything from core to opportunistic and equity to debt.

Ahead of RE-Invest 2014, held on March 11, IP Real Estate spoke to two participants, Tomas Beck Svennson and Adam Cibik, who both head the real estate investment activities of institutional investors from Sweden and the US, respectively.

Tomas Beck Svensson, Första AP-fonden (AP1)

Swedish national pension fund AP1 has been seeking to increase its exposure to international real estate markets in recent years. When the global financial crisis struck in 2008, AP1 already had plans in place but it still had no exposure outside Sweden.

When Tomas Beck Svensson left StorebrandFastigheter in 2011 to take up the role of real estate portfolio manager in 2011, “it was a work in progress”, he says. “Since I joined we have refocused that effort and worked on implementation.”

The main rationale for investing outside Sweden is to achieve “higher risk-adjusted returns” for the real estate portfolio, according to Beck Svensson. Diversification in the overall investment portfolio is one of the “key drivers” for AP1 to invest in real estate, but this does not necessarily mean that the property portfolio itself needs to be diversified.

“It’s the diversifying characteristics with respect to the overall portfolio that we primarily are seeking,” Beck Svensson explains. “Therefore, we are taking a more holistic approach and looking to build a diversifying, rather than diversified, portfolio.

“We are not looking to be present in every sub-market globally, but rather in those markets that we have identified offering a combination of good prospects and a low-to-medium correlation to our home market.

“At the same time, we must feel comfortable investing in these regions, given the macro fundamentals, from a risk perspective and a total-return perspective when weighing in all the costs associated with it. We do not think that we need to be invested everywhere to get the best part of the diversification that we are looking for.”

AP1, which recently acted as the cornerstone investor in Aberdeen Asset Management’s ‘secondaries’ fund of funds, is choosing to invest in foreign real estate via funds, rather than more direct approaches.

“We are using the fund model and are seeking to invest with managers that we deem as the best in the sub-markets that we are interested in,” Beck Svensson says. “We have not joined the joint venture/club trail, as I generally see more problems than merits with that model for an investor our size.”

Beck Svensson would describe AP1 principally as a “core investor”, but the institution is also looking at other types of strategy. “We are not so focused on what it’s called, but rather looking for total returns that, over time, are largely driven by, preferably, inflation-linked income,” he says.

“We have identified some markets and segments that we think offer better risk-adjusted returns right now than, for example, prime offices in gateway cities. We have made some investments over the last one-and-a-half year, or so, in order to capture that.”

AP1 has invested through the listed real estate markets and Beck Svensson says its two listed mandates “have served us well” in building exposure to some non-domestic markets. “However, seeing the disconnection between returns from direct real estate and listed – at least in the short-to-medium term – we will likely be using the listed side more for a tactical, rather than strategic, play in the future.”

On emerging markets, Beck Svensson says AP1 is generally positive. “However, given that real estate is a very heterogeneous asset class, which is even truer when it comes to emerging markets, I don’t think that there is such a thing as ‘market returns’ from these markets,” he says. “The returns are very dispersed from a general index, and whether it’s equities or real estate, it all comes down to stock picking. Without intimate knowledge of such a market, you can go awfully wrong there. We are taking a cautious approach and have no rush in going into all of them.”

In terms of sectors, AP1 does not focus on devising specific property-type allocations, but “rather tries to identify the mix of fundamental features that gives us the best risk-adjusted returns over the long term”.

Asked whether investors need to reassess their sector allocations to take in ‘bigger picture’ trends, such as ageing societies and technological development, Beck Svensson agrees.

“I think so – if they want to capture all the positive characteristics that real estate as an asset class offers,” he says. “There has been a strong focus on offices and to some extent retail, historically, and only lately has the broader institutional investor base opened up to invest in alternative sectors. I think that we will see that trend continuing and alternatives will become a bigger part of institutional portfolios in the future.”

Adam Cibik, Employees Retirement System of Texas

The real estate programme of the $25bn Employees Retirement System of Texas is only four years’ old, but already the pension fund has built up a portfolio worth approximately $2bn in the US and Europe.

“ERS, as an organisation, is quite old – we were founded in the 1960s – but the real estate programme was started in 2010,” says Adam Cibik, portfolio manager for real estate. “We began with core investments in the US. There was a perfect timing with those; we got them right at the bottom of the cycle. And from there we expanded to value-add and opportunistic investments. And then a few years ago we made the programme global and we branched off into Europe.”

In 2012, ERS Texas hired Aberdeen Asset Management’s multi-manager business to manage what Cibik calls a “hub and spoke strategy” for the region. Most recently, the pension fund invested in a pan-European logistics fund managed by Prologis and a pan-European opportunity fund managed by Orion Capital Managers. But its first investments in Europe were through two mezzanine debt funds.

“We went to Europe at the height of the crisis with these mezzanine debt funds, because we realised there was a large capital gap, in particular in the core European countries – France, Germany, the UK,” Cibik says. “We still think there is a capital gap there that will last to 2016, or 2017, and the investments have worked out pretty well.”

Moving into Europe in 2012 meant that the pension fund was ahead of many of its national peers. While many US pension funds are now looking to move into European real estate for the first time since the financial crisis, Texas ERS is now looking to Asia.

“Now, of course, all the pension funds want to go to Europe, we’re hearing,” Cibik says. “It’s become the flavour of the year. And so now we are slowly looking at Asia, as well as emerging markets and alternative core markets like healthcare, student housing. Timberland is an interesting space; maybe self-storage, if it can be accessed.”

Cibik attributes the pension fund’s ability to move quickly to its “forward-thinking board” that contains both academics and commercial professionals. He explains: “That really allows us to make decisions on behalf of the funds that I would say are a bit quicker than a traditional US pension organisation, and that’s worked out; that’s reflected in our returns and the quality of our portfolio.”

He recalls that when ERS Texas was making its first commitments in Europe in 2012, “everyone was talking about the euro-zone break-up”. He says: “People were talking about the future of European growth and the banking industries, everything falling apart. To place a direct fund investment and then another one right after that into the region was seen as high-risk, but we’d studied the fundamentals. We’re very much reversion-to-the-mean investors. And, additionally, Europe was unique because the crisis was exacerbated by the single currency tied to independent countries. It’s part of the cycle, and so the trick is to get ahead of the market and get your money in there before everyone else does.”

Cibik continues: “Many of our investments follow a conscious thesis or strategy on the market. The two mezzanine vehicles were a result of research we performed on the capital gap in Europe in terms of what was happening in the CMBS market and in the bank-lending market, and how that gap would be there between refinancing and availability of debt rolling over. And we still think the capital gap will be there, at least until 2017. It is moving much more slowly than even the pessimists thought.”

“We saw Europe to be half a cycle behind the US. The window opened and it’s closing, but it’s closing at a much slower pace,” Cibik adds. “We see it there for at least the next two years.”

The industrial sector was also targeted in 2012, in anticipation of rising inventories, consumer shipments and the growth of online commerce. “Since we made that call 18 months ago, it has worked out very well,” Cibik says. “The markets have come back and we actually came into Europe in industrial as well, simply because we saw Europe one half-cycle behind the US and pricing there was very favourable. As soon as it we saw it happen in the US, we said, okay, we have six to eight months to get into Europe before that window closes. That thesis has proved to work out as well.”

In addition to a forward-thinking investment board, Texas ERS receives helpful input from RV Kuhns & Associates, a real estate investment consultancy. Cibik emphasises that the pension fund uses the company as “more of a sounding board”, rather than fully outsourcing its investment strategy.

“We don’t outsource all of our real estate functions to an external consultant,” he says. “We have an internal investments team here and we write our own memos, do our own models and do our own analysis. Every US pension fund has a consultant, but where I like to think we are bit different is that sometimes we take the lead, sometimes they take the lead; sometimes we disagree with them, sometimes they disagree with us.

“They are like an independent board member in and of themselves to really challenge our ideas, and sometimes we challenge them. That helps us steer us in the right directions and really build conviction behind an investment thesis. That relationships helps us to form our own ideas and we can enter new markets ahead of the curve.”

Pursuing a global approach to real estate enables an investor to “add alpha”, Cibik suggests. “We get asked a lot: why are you investing in London when you could invest in New York? Why are you going to France or Spain when you could go to Atlanta, Georgia or Texas? It really is a way of adding alpha into the portfolio, of getting into cycles at different points and at different times, and that really is the benefit of a truly global strategy. And it works.

“During the crisis, all the markets fell at once in tandem. But as the markets bounced back they bounced back at different times and they bounced back at different magnitudes. Some markets are fully bounced like central London; some have not bounced back at all. So every- thing is on different cycles. So the advantage of having a global strategy and entering into these new markets and finding good local talent is to get in at a point in the cycle where there is that upswing. And always somewhere in the world there is a cycle that is on an upswing.”