Do we need liquidity in a real estate portfolio? The nature of real estate often makes it challenging to achieve and there are varying opinions as to whether it really is crucial in the real estate part of a multi-asset portfolio. Richard Lowe talked to three pension funds about their views
Chief Investment Officer Real Estate
Total assets: €8.2bn
Real estate assets: 14.6%
Real estate is not intended to act as a source of liquidity per se for NAEV but, in common with all investments across the pension fund's portfolio, it is seen as a necessity to maintain a level of liquidity.
"It is very much in line with our overall philosophy of liquidity," says Hermann Aukamp, real estate CIO at NAEV. "We try to establish a certain degree of liquidity in all investments. And on the real estate side, this is a problem for us."
NAEV always seeks to invest in liquid property markets and this proves challenging for both direct and indirect investments.
"We still do direct investments and we are always decided only to invest in liquid markets and size-wise in liquid properties. In direct investment, it is about lot size. When you are investing in bigger lot sizes, these may be less liquid than smaller lot sizes.
"When we invest in REITs or property stocks we may want to change our allocation and we may want to get out of certain markets soon, so we always invest in liquid stocks and not so much into small caps."
Aukamp says that smaller countries, such as Norway, can prove to be ‘interesting' markets, but such investments are often unable to offer the sort of liquidity that the fund requires. The same applies to small cap investments.
"You have to decide what you really want to do," Aukamp says. "Do you want to take advantage of small caps you like or do you need liquidity? How much do you invest into these stocks and small caps? You have to measure your investments size-wise."
Head of Real Estate investments
Total assets: €10.5bn
Real estate assets 11.4%
TKP Investments runs two property funds of funds in Europe and Asia, respectively, for TKP Pensioen and a collection of other Dutch pension funds. The European fund, LIREF, which is much larger at close to €1bn assets under management, has an investment period of seven years.
Robert-Jan Tel, head of real estate investments at TKP, says that TKP Pensioen, along with other pension funds investing in LIREF, takes a long-term view on real estate and "accepts a degree of illiquidity".
Tel admits that pension funds like to have liquidity to be able to "step out" of investments, but because real estate investments, on average, represent a 10% allocation for pension funds, there isn't a marked need for liquidity to "fulfil their liabilities or obligations to pay their pensions."
He adds: "In that sense, liquidity is an issue, but not an immediate issue such that you should be able to free up your capital tomorrow or next month."
Furthermore, TKP invests only in non-listed properties and real estate funds, which are not easily traded. Some of the funds are open-ended, but the majority - especially those of the opportunity and value-added type - are closed-ended with a term of six to 10 years.
However, he believes there is a growing market for trading stakes in funds instead of "selling off all the assets, raising a new fund, starting all over again", which will help increase liquidity.
He says that some brokers in the UK have already entered "the market of trading stakes in funds". He adds: "There have been some here in the Netherlands as well, but very rarely yet."
"If you want to manage your portfolio and take a little bit more value-added or take a little bit more core or be able to put more of your money in certain sectors or regions, there needs to be some liquidity in the market and I expect that this will grow as well."
Total Assets: €2.5bn
Real Estate: €2.5%
The level of liquidity within the real estate portfolio is not a major concern for APK Pensionskasse, according to chief executive Christian Boehm.
"In general, from our point of view, for real estate investments it is not really a big issue," he says.
Having said this, Boehm admits that the maturity of the Austrian pension fund means it is not always desirable to place new capital into direct investments. The asset-liability management, he says, can become problematic if too much direct investment is taken on.
"We like to have good direct property investment in the portfolio. But on the other hand we see the problem of asset liability management if we invest too much directly, because each year the plan is diminishing and the property account will increase significantly and it will be complicated to manage.
"It can be a problem to build up the asset allocation structure, because I cannot sell a property (if it is a direct investment) every year. The shifting around of such investments is an issue in such mature plans."
APK invests in real estate through both direct and indirect means. In terms of the latter, the pension fund employs a number of different approaches, from investing in property stocks to committing to various real estate investment funds.
One category of vehicle that is not invested in is the open-ended fund - instead, APK favours entering into closed-ended investments. Mutual funds, especially, which hold proportions of their assets in cash, are deemed undesirable.
"What we do not do is invest in open investment funds like mutual funds which are available on the market," Boehm says.
"We do not like to invest in a property investment which has necessarily too much cash for redemptions of other customers in the portfolio."