After a brief post-crisis hiatus, international strategies are back on the agenda. Rachel Fixsen talks to six investors and advisers.
Michael Nielsen, ATP Real Estate
• Danish pension fund invests in Europe, US but not Asia
• Takes time to build a base of fund managers in a region
As one of Europe’s largest property investors, one might expect the real estate arm of Denmark’s DKK600bn (€80.4bn) statutory pension fund ATP to have its toe in most major markets around the world. But while ATP Real Estate does invest inter- nationally, so far it has limited its property buying to Europe and the US.
“When we decided to take an international approach, we did Europe and then the US, and we simply decided to build that up before going to another region,” explains Michael Nielsen, director of ATP Real Estate.
Back in 2006, ATP Real Estate was given the go- ahead to invest in the US and went on to make its first commitment two years later.
While ATP has diversified its property holdings internationally, Nielsen says such an approach is not suitable unless a pension fund is big enough. “It wouldn’t make sense if you are a small or medium- sized pension fund to spread your investment glob- ally,” he says. “The markets are so different, and that takes up a lot of resources.”
It takes time to build up a base of managers in a new country or region, he observes. “You have to have the right people to work with in various segments of real estate. You have to be very selective.”
It was always clear that pure domestic investment was not an option for ATP.
It needed a greater number of investment opportunities than a country the size of Denmark could offer, Nielsen says. But having access to a bigger pool of assets is not the only advantage of international diversification. “Another benefit is that you can hit different cycles,” Nielsen says, though he notes this is not always the case. “A few years ago, we were in a global downturn,” he says. “We were in the US and Europe, and they were both in the in the same position.”
ATP has 60% of its real estate assets in Denmark, 30% in Europe and 10% in the US. However, the pension fund has recently increased its allocation to Den- mark, because of a number of larger domestic deals it was able to do.
In January it joined forces with PensionDanmark to buy the historic central Copenhagen building housing the Magasin department store.
AMF Real Estate
• Clear rationale to stick to domestic property
• Any future global investments would entail some form of partnership
Swedish pension fund AMF has 13% of its €40bn in assets under management in property, but has no intention of spreading the allocation internationally.
AMF’s equities and bond investments are divided between domestic and international holdings, with around half of each asset class in foreign securities. But Martin Tufvesson, transaction manager at AMF Real Estate, says there is a clear rationale for keeping the real estate holdings within national borders.
“The property portfolio is regarded as a balancing diversification, and we are not looking for international diversification within real estate,” he says.
Within Sweden, the main part of AMF’s property portfolio is in commercial real estate concentrated in the Stockholm area — specifically on the CBD, and other communication hubs in the inner city and on the city’s fringes. “The portfolio is allocated to offices and retail,” Tufvesson says.
The retail segment is made up of five inner-city shopping malls, including the big premium shopping destinations Gallerian Hamngatan and MOOD Stockholm.
“We also own 50% of a residential company focused on residential properties in a number of regional cities in Sweden,” he says. “The residential allocation is a diversification, but it is still domestic.”
AMF carries out all of its investments in-house, and Tufvesson says its investment management strategy is quite the opposite of one based on global funds. “A focused portfolio, large stakes in a smaller number of assets and a diversified equity portfolio regarding segments and markets, in-house analysis and trading,” he says. “Simple and secure is a part of our idea.”
Local knowledge is key for successful investment, he says. “Our domestic commercial portfolio is run by an in-house management team and the co-owned residential company has also a full-scale management team to take care of the investment and property management. He adds: “Any future international real estate investments from our side would most likely be some kind of partnership with a local, well-established investor.”
AMF is still aiming to increase its allocation to property. “The challenge is, as always, to find reason- ably good and interesting properties in our selected markets to the right price,” Tufvesson says.
• Italian pension funds looking to global investments
• Most funds invested directly in residential and commercial
In Italy, pension funds are now finding good reasons to invest in international real estate, relaxing their traditional focus on the home market, according to Alessandra Pasquoni, head of investment in Italy for Towers Watson.
“Historically, Italian pension funds have been investing in real estate, mainly with a focus on the Italian market,” she says. Most funds have invested directly, she says, by acquiring residential and commercial properties. “The
direct management of real estate portfolios can be quite expensive in terms of the resources and expertise needed to perform the different duties.
“Those funds are also experiencing portfolio evaluation issues as direct real estate investments are not listed. Since the financial market crisis, the Italian real estate market has slowed down and this has impacted the performance of pension funds’ real estate portfolios, due to constraints on their ability to rent and/or sell the property.”
As a result, many Italian pension funds are now seeing benefits in diversifying their real estate port- folios. “Based on their asset allocation, some clients are investing in real estate funds with a broader exposure – diversifying the risk-return profile of their real estate portfolio and the geographic and sector allocation,” she says.
Pasquoni sees other advantages for Italian pension funds in investing via real estate funds – for example, access to more tradable assets and a greater range of properties. It is also a method of investment that has low governance requirements and needs fewer inter- nal resources to manage and monitor portfolios.
However, Pasquoni notes that some Italian pension funds are not willing to increase their real estate exposure within their overall asset allocation. “Their main issue is increasing the efficiency of the current portfolio by appointing a real estate asset manager with a mandate to perform due diligence and investment activities,” she says. This will allow the pension funds to externalise most of its portfolio management and to concentrate instead on strategy, says Pasquoni.
• Pension fund has allocations to several global regions
• Requires larger pool of potential investments to reach target
Germany’s €55bn Bayerische Versorgungskammer (BVK) has two reasons for investing globally within its property division. On the one hand, the approach allows it to diversify its risk, says Norman Fackelmann, head of property investment management. The other, he says, investing in countries around the world gives it a big enough pool of potential investments for it to generate the volume required to reach its target allocation for real estate investments.
BVK uses global strategies from external managers, partly, Fackelmann says, to support its own general strategy. “That means the planning of our target portfolio is assisted by an external consultant, particularly for the target quotas,” he says. “Within the implementation our external funds, managers support us by means of market analysis and investment proposals.”
In 2013, BVK awarded two global real estate mandates to LaSalle Investment Management and CBRE Global Investors worth €500m each, hiring the managers to invest in a range of property in various regions, with different capital structures and risk profiles.
BVK now has allocations to several different areas of the world, although the emphasis remains Euro- pean: 45% is invested in central Europe; 5% in Eastern Europe 8% in Scandinavia; 27% in the US; 4% in Latin America; 11% in Asia Pacific.
Fackelmann has a clear idea of what it takes for a global strategy to succeed. “The most important ingredients are an accurate asset allocation and paying attention to market cycles,” he says. “The strategy has to be fitted to the particular region and market. Germany, for example, is a very stable market so we invest there long term, while more volatile markets, like UK or Asia, require good timing for buying and selling to benefit from market cycles.”
BVK is mainly interested in core and mature markets. “The main problem is the high demand for core investments and yield compression,” Fackelmann says. “The supply is much too small to satisfy the demand, which leads to a high price level.”
Although yield compression can often be compensated by using leverage so that the cash flow return is sufficient, Fackelmann cautions that the high level of prices creates the danger that what is leveraged will lose value as well.
• UK pension funds looking for structures that give them control
• Direct investment overseas can maximise tax-efficiency
While pension funds in the UK have been looking outside their home country for new property investment, they have set their sights on structures which give them control over the new holdings, says Gavin Bullock, partner at the consultancy. “Some of our pension fund clients have been seeking guidance around non-UK property investment, typically as a complement to their existing UK real estate expo- sure,” he says.
“Where schemes have non-UK property investments, this has largely been through pooled funds managed by external managers or where they have instructed a single manager to invest into a portfolio of different regional funds on their behalf. However, as with their approach to UK real estate investment, many pension funds are now looking for additional control over the assets they invest in and this trend looks sets to continue for overseas investments.”
Recently, larger UK pension funds have been taking advantage of the resources they have available by making direct non-UK property investments. Apart from giving them flexibility and control, this method also enables them to ensure any investment is structured in the best way in terms of tax, Bullock says.
For example, certain jurisdictions such as Ireland and the Netherlands offer the opportunity for UK pension funds to invest in real estate without any local or UK tax. “Investing directly maximises the potential for this tax-free investment, whereas investing in some pooled funds may not always be so efficient.”
Bullock says the pension funds of some multinational companies are now using pooling within alternative asset classes, and property in particular, much as they have been pooling equity investments to achieve economies of scale and improved governance.
“As such, it is not uncommon to see pension funds located in different countries but connected by a common employer pooling their funds to make real estate investments,” he says.
Apart from giving reduced fees, this approach also has an impact on the geographical spread of investments. “While most pension funds typically invest heavily in the country in which they are located, pooled structures tend to be more balanced internationally.”
Peter de Haas
Cornerstone Real Estate Advisers
• Dutch and Nordic investors historically more willing to diversify globally
• German funds increasingly involved in global investments
Pension funds in continental Europe are readier to diversify their real estate investments globally than their UK counterparts are, observes Peter de Haas, head of business development for Continental Europe at Cornerstone Real Estate Advisers. “Historically, Dutch and Nordic investors are more about diversification in global regions,” he says. “There is a trend for German pension funds to be more willing to invest globally, as they want to diversify into different markets to stabilise return.”
Pension funds have become more keen to spread their risk away from their home markets, partly because of the European property market situation, which has not been good up to now, de Haas says.
But he says quite a few funds have focused on the US because of the perceived higher potential returns there. “There is also a selected interest in Asia, but the return profiles in Asia are more opportunistic, so there’s not so much focus on that,” he says.
De Haas says investors as generally more interested in focusing on core income return strategies. Larger pension funds are more likely to use joint ventures and club deals to access international property markets, because they are more comfortable investing alongside other investors they know and understand — investors that have a similar approach. “That’s what they learned from the crisis,” he says.
German pension funds have historically been more interested in holding real estate as a direct investment, although several of the pension funds have now invested in funds, de Haas says.
“That’s the most interesting side of the market — the German buy-side,” he says. “Up to now they were just focusing on domestic market, but it has become a growing investor group internationally.”
Some German pension funds are already in a situation where they have quite a balanced property port- folio internationally, he says.
“European investors will invest more into European real estate as the market starts to recover,” de Haas predicts. “What we see now is American investors looking at distressed investment opportunities — but European investors will follow.”