Denmark’s largest pension fund ATP wants to be in control of its real estate investments, especially when it comes to the exit, Michael Nielsen tells Richard Lowe

It is all change at the top for Denmark’s largest pension fund. Carsten Stendevad is due to assume the role of CEO of ATP later this year, taking over from Lars Rohde who has become governor of Denmark’s national bank. In November, Rohde, who has led ATP since 1998, was honoured for his outstanding contribution to the European pensions industry at the IPE Awards 2012 in Copenhagen.

In contrast, it is more a case of steady continuity for ATP’s sizeable domestic and international real estate activities. The majority of the focus in recent years has been on the former, a portfolio of 75 office and retail assets – many, such as the new UN City building, considered trophy buildings – located mainly in Copenhagen.

From ATP Real Estate’s office in Gothersgade, overlooking the Rosenborg Castle Garden, Michael Nielsen, head of real estate at ATP, and his team of 50 professionals oversee the directly-owned portfolio, which is valued at close to DKK13bn (€1.7bn), and represents more than 700,000sqft of commercial space.

“To maintain the occupancy in such a big portfolio is hard work every day,” he says. The office vacancy rate in Denmark is 10%. The rate in ATP’s portfolio is considerably lower at 4.5%. “We have spent an enormous amount of resources simply to keep our portfolio in good shape.”

Why the focus on Denmark? “In Europe we still see uncertainty in many markets,” Nielsen says, citing obvious examples like southern Europe. “The UK market is a challenge now – to understand where it will go. So you can say, here in Europe, we are more or less back in the Nordics, perhaps Germany too. And we are well allocated to these parts, so it’s not that we are actively pursuing opportunities there.”

There are no plans to invest in Asia-Pacific, but ATP Real Estate has moved into US real estate. It started investing in 2008, and in 2011 it committed capital to the Invesco Core Real Estate – USA fund and the UBS Trumbull Property Fund. As with all its real estate investments, it is focusing on the core market.

“The investments we have in the US have performed well in recent years,” Nielsen says.
“Our eight investments in the US generated double-digit returns in 2012.”

ATP’s focus on its domestic property market is perhaps best explained by its decision to stick to an exclusively core investment strategy. “We have decided to stay down the risk profile in the future,” Nielsen explains, “much more focused on stable income. We really expect that all our investments in the future will be without gearing.”

But Denmark has not avoided the flight to quality affecting all major markets in Europe.
“We are not the only investor active in the market,” Nielsen says.

There have been examples of office yields in Copenhagen falling below 5%. Nielsen attributes this to other investors that employ leverage, invariably using Denmark’s efficient domestic mortgage system.

“Investors who want to put leverage into their investments here in Copenhagen can use that mortgage system, and compared to bank loans it is very attractive,” he says. “That means if you are a geared investor you can start putting in 60% leverage with an interest rate of 3.5-4%, and you can see that will have a big impact both on your return but also on the price you are able to pay for the asset.”

This could theoretically lead to a slowdown in activity for ATP. “If we don’t find the right quality or the asset which fits both our strategy and portfolio, we simply do not invest,” Nielsens says. “It is not so that we have a fixed amount to invest every year. We work on a case-by-case basis.”

ATP’s existing allocation to real estate is in the range of 5-6%. “That’s not a high figure compared with pension funds in other countries. But we don’t have a fixed target. We want the right quality and the right assets.”

What does this conservative investment strategy, when combined with the current market environment, mean for the evolution of ATP’s international real estate portfolio?

“Perhaps we will also diversify differently, meaning that we will concentrate on fewer investments than just spread all over,” Nielsen says. “Another key for us is to keep control of what we’re doing and not leave the important decisions to managers or banks.”

A particular issue for Nielsen – a lesson well learned during the recent crisis – is that real estate funds are often motivated to sell assets at a time when ATP would prefer to hold. Being in control of the exit of investments is now paramount. “Consequently, we will not be so active in the general fund market,” he says. “We will look more into club deals, joint ventures, separate accounts to fulfil the strategy.” He adds: “Many funds are in the exit phase these days. And now is perhaps the worst time of all to exit.”

But it is for this reason that exit risk is also addressed in joint ventures and club deals.
“You have to be very careful when you select your partners; make sure they have the same view, the same idea,” Nielsen says. “Normally, we will agree some kind of exit mechanism. If yourself or your partner suddenly [needs to exit] there is a mechanism in place for that.”

Is there a mismatch between what institutional investors want and what fund managers still think are required of them? “Many managers are really struggling to raise money, for many reasons,” Nielsen responds. “But one of the reasons could be that bigger investors have changed their focus to other investment products or types of investment, like open-ended, low-geared funds, joint ventures, club deals, separate accounts, even direct investments. I think many managers have to revise what they offer.

“They also have to look at their fees again. It’s a different price to manage a core fund than an opportunistic fund. I think the fee structures have to be reconsidered, because as institutional investors we have such a focus on cost... we are told nearly every day how important it is to keep costs low.”