The largest Dutch pension funds continue to be active in the markets. But their approaches differ, as Leen Pressman reports

Dutch pension funds have a long history as real estate investors. But the financial crisis has led many to shift their strategies and approaches.

The large metal pension schemes PMT and PME, both of which are managed by asset manager MN, have invested globally in the past, but today are focusing on direct real estate in the Netherlands. “As the investments are close to home, both pension funds have more affinity with the assets,” says property analyst Michiel Moll. “MN sees much potential predominantly in the domestic housing rental sector.”

He adds: “Because both prices and demand for domestic owner-occupied residential property are still in decline following the economic situation, in combination with the continuing uncertainty about government policy, institutional investors are now in a good bargaining position. Developers are having a hard time selling their projects.”

According to Moll, there is a significant shortage of domestic rental property in the mid-priced and unregulated areas of the market in the main urban areas of Amsterdam,
The Hague, Utrecht and Brabant. As a result, the pension funds’ current housing stock is almost fully occupied.

 “Domestic rental real estate provides pension funds with a stable cash flow of 4-6% from rental income,” he says. “And, not in the least, the returns are also inflation-linked.”
 MN also believes that direct retail properties have good prospects for solid returns.

“However, purchasing prices are less attractive, in particular in the right areas,” Moll says.
“The retail market is also suffering from the economic downturn. As a result, relatively low-risk objects that fit our investment criteria are either limited or too expensive.”

The €47bn PMT, the larger of the two metal schemes (PME has €32bn in assests), recently announced it would invest €300m in the Dutch housing market, of which €250m would be used to increase its current portfolio with 1,250 new rental properties. It said that it would invest the remaining €50m in improving the sustainability, maintenance and renovation of its existing 2,200 housing stock. Improvement would include the installation of high-efficiency boilers, solar panels and heat insulation. PMT also indicated that it was considering investing a “considerable amount” in the housing market through investments in mortgages.

PMT’s focus on the domestic property market came after it recently reorganised the allocation and strategy of its property investments, following a pause in new investments since 2008.

In its latest annual report, PMT concluded that it should focus on extending, replacing and rejuvenating its portfolio. It also said it would divest its directly-held international property investments, which represent 3.5% of total assets. “These large direct stakes overseas don’t match our wish to be better in control,” says Annemieke Biesheuvel, spokeswoman for PMT.

The pension fund recently sold its 50% stake in an office building at Madison Avenue in New York that it had co-owned since the 1990s. “The investment has generated a yearly return of 16.2%, but it needed a large-scale renovation,” Biesheuvel says. “Following a thorough survey as well as a risk assessment, we have decided to divest.”

PMT has allocated in total €1.4bn to Dutch direct real estate, of which €580m is to to rental domestic property. Last year, PMT returned 9.6% on its entire property portfolio, consisting of 10% of its assets.

Bouwinvest takes a global view
Bouwinvest Real Estate Investment Management, the property asset manager of the €37bn BPF Bouw pension fund, has been targeting €1bn in new real estate investments for 2013. But unlike MN’s focus on direct domestic investments, the asset manager is looking to invest significantly in the US, Asia and Australia – markets it has identified as offering greater growth potential than Europe through positive demographic developments.

According to director Dick van Hal, Bouwinvest favours offices and housing with good transport links in larger towns for its international investments.

Last year, Bouwinvest added global listed property funds “in order to offer its clients a full range of investment options”. Van Hal says there is a need for careful assessment when deciding whether acquisitions should be made in the listed or non-listed sectors.
“Currently, the latter is cheaper, but markets can turn quickly.”

Van Hal says many Dutch pension funds are evaluating their property investment policy.
“In order to diversify, many pension funds are considering spreading their investments worldwide,” he says. “As a consequence, dozens of pension funds, including two large ones, are consulting us about outsourcing their real estate management. However, progress is slow, as matters are complicated and we are dealing with illiquid objects.”

As well as applying for a licence to operate under the Alternative Investment Fund Managers Directive (AIFMD), Bouwinvest has simplified its business structure by merging its Dutch project development and asset management arms into one unit to operate alongside its international investments arm.

Van Hal says the Dutch property market had been difficult over the past year, with negative sentiment towards the office markets in particular. As a consequence, Bouwinest has refrained from increasing the size of its €500m Dutch office fund. “We want to wait until the bottom of the market has been reached,” he says.

Van Hal is also sympathetic to the Dutch government’s plea to increase local investments by pension funds. But government-backed mortgage loans are not his favourite option.
“Such an investment would be too susceptible to interest risk.” He says. “Therefore, we prefer direct investments in unregulated domestic rental property. They offer similar returns, which are also index-linked.”

Last year, Bouwinvest REIM returned 1.8% on its real estate investments, with Dutch and international property generating 0.9% and 4% respectively. Two-thirds of its property portfolio has been invested in the Netherlands.

APG favours logistics, debt
Patrick Kanters, managing director, global real estate and infrastructure at the €338bn asset manager APG, says the investor is continuing its integrated approach of blending public and private property. APG manages Dutch pension fund assets, including those of the Netherlands’ largest, the €286bn civil service scheme ABP.

APG has been active in both listed and non-listed markets on a global basis, including logistics in Japan and residential financing in the UK. “Our main criterion is picking the best asset manager and the best assets, with the accent on North America, Europe and Asia and Australia,” Kanters says.

Investing in modern logistics warehouses is one of APG’s focal points. “We see them as attractive objects, due to the limited capital expenditure requirements, as well as the appealing cash yields, compared with other real estate sectors,” Kanters says.

Recently, APG committed almost €170m to Japan Logistics Fund III, a fund managed by LaSalle Investment Management, which is targeting the development of multi-tenanted logistics facilities in Greater Tokyo and Greater Osaka. APG also increased its stakes in two funds managed by Goodman that target the Hong Kong and European logistics, respectively.

APG’s focus is on developing logistic warehouses in Japan, rather than long-term ownership. “Because of Japan’s ageing and declining population, the prospects are not perfect,” Kanters says.

APG has also increased its allocation to real estate debt strategies. It teamed up with LaSalle Investment Management to provide £238m (€282m) in senior debt financing to London residential projects and UK student housing developments.

The joint venture means APG now has two managers overseeing its real estate debt investments in Europe, having earlier awarded a mandate to Pramerica Real Estate Investors to invest in commercial property debt.

According to Kanters, APG is also raising its exposure to indirect domestic rented property, with the emphasis on multi-family apartments and student housing in important, growing cities such as London, New York, San Diego and Los Angeles. He says these investments are predominantly made through club-style vehicles that afford a small group of investors greater control and flexibility. APG’s participations in club deals usually vary from €100m to €400m, Kanters says.

Furthermore, APG is planning to improve and reinforce its stake in retail centres, such as recent investments in the large shopping malls Cap3000 in Nice and Westfield Stratford City in London. The same goes for its investments in factory outlet centres and important inner-city shopping areas, Kanters says.

ABP, APG’s main client, reported a 16.2% return on its property portfolio last year. Its strategic investments in listed and non-listed property companies and funds, joint ventures and co-investments generated 12.3%, while its tactical real estate holdings in listed companies and funds yielded 27.7%.

APG also intends to double its infrastructure holdings to approximately 4% of its overall portfolio. It will invest in Europe, the Americas and Asia through club-style participations and co-investments. Kanters says the focus will be on non-listed investments with long-term and guaranteed cash flows, such as wind and water energy, as well as transport projects and tank storage. “As we want to limit our exposure to market risks, we need a very different and diversifying asset class,” he says.

Last year, ABP’s 1.9% infrastructure portfolio returned 4.4%. The scheme attributed the underperformance of 4.4 percentage points to the weak economic situation worldwide, and the resulting decline in the use of toll roads, airports and ports. ABP added that starting costs of new investments negatively affected its returns. However, it also acknowledged that low interest rates allowed for attractive re-financing conditions and higher valuations.
PGGM still championing REITs

The €140bn pension asset manager, wholly owned by large pension scheme PFZW, has also been active in listed and non-listed real estate. For the latter, it has been mostly active in the US. It has focused on shopping malls that cater for basic goods, where returns are expected to be highest. PFZW’s private real estate portfolio returned 5.7% last year.

PGGM has also been active in the listed markets, including real estate investment trusts (REITs). “In particular in southern Europe, where the structures still need to be perfected, we expect a trend to REITs,” says Hans op ‘t Veld, head of listed property at PGGM. “REIT structures tend to develop during financial crisis, as shown by the growth of the US REIT market in the early 1990s.”

In most countries, REITs are PGGM’s dominant investment vehicle, with its holdings in North America – making up 50% of its investment universe – almost entirely invested in REITs.

PGGM made the headlines earlier this year when it led a shareholder revolt to push through the resignation of the chairman of the supervisory board and executive board of German property firm GSW Immobilien.

“GSW has acted sensibly,” says Op ‘t Veld. “Its decision should be a signal to other companies that it is the shareholders who own a company, and should also act as an encouragement to improve communication with shareholders.”

PFZW’s listed property holdings returned 28% last year, with investments in China and Japan generating 57.4% and 87%, respectively and helping drive an outperformance of 0.2 percentage points.

“The return from investments in Japan was a very special case, as quantitative easing after years of deflation triggered a spectacular revaluation of property companies operating in the office market,” Op ‘t Veld says.

The outlook for the Japanese market is also promising and “the investments in China continue to benefit from the continuing urbanisation,” he says. “However, as credit has been tightened, performance is slowing down.”