Altera's approach that offers zero leverage and real core portfolios is proving attractive to Dutch pension funds looking for a low-risk way to invest in real estate profile, says Richard Lowe

Altera Vastgoed was established in 2000 when four pension funds in the Netherlands - Hoogovens and three KLM funds - transferred their direct real estate portfolios to the independent company to be managed externally, and with a view to attract other pension funds. Today, Altera has 26 investors, all of them Dutch pension funds. Three joined in 2009, taking total assets under management to €1.5bn, and the firm expects to win more business in the future.

Altera is in the selection process for a number of pension funds which are either looking to invest in real estate for the first time, moving from a listed property exposure to a non-listed one, or simply extending their existing non-listed investments. The attraction of Altera is that it is wholly owned by its shareholders and runs on a cost basis. The total expense ratio (TER) for Altera is currently 31 basis points, which compares favourably with INREV's average fund management fee (based on gross asset value (GAV)) for core funds (0.59%), or average TERs for funds fully invested (1.34%) or during the investing stage (0.82%).

Cyril van den Hoogen (above), CFO at Altera, explains that the 26 pension fund shareholders own the management company, which is integrated with the real estate portfolio and does not have its own separate balance sheet. "It is more like we are a cost factor and we try to operate under the level of their cost benchmark. At the same time we seek to provide the performance they are looking for at a low-risk profile. It is quite unique," he says.

Altera offers investors exposure to core Dutch real estate, but with the choice of four market sectors - residential, retail, office and industrial. The pension funds themselves need to decide which sectors they want to gain exposure to, and can adjust their weightings between the four funds on a quarterly basis. Altera does not offer a balanced exposure to the Dutch market through one fund, but investors can opt to invest in all sectors.

"We offer four sectors. We don't offer a mix. They have to decide themselves how they want to be invested in terms of sectors and decide their own allocation," van den Hoogen says. "They can choose one sector, or three or four. Another feature is that they can enter or exit on a quarterly basis. We have entries every quarter, so we externally appraise the properties every quarter."

Altera has been given €200m in additional capital from its investors for 2010, most of which has been directed towards the residential and retail sectors, reflecting current market preferences among investors. The office and industrial sectors in the Netherlands, as with the rest of Europe, are more volatile, and so it is not surprising that less money is being funnelled into these sectors, given investors' current risk-averse behaviour.

"If you look at the retail sector it has always been a very stable performance sector, because of our zoning and planning, which is very strict. It is very stable," says René Hogenboom, CEO at Altera. "The residential sector, which has always been a favourite for institutional investors over the last couple of decades, is a little bit more volatile, because we had a large appreciation of residential real estate. But that is a long-term play, so in the long run we look to deliver performance as usual."

The new volume of capital recently made available to Altera means that the company is now on the buy-side in the market, following a two-year period on the sidelines. "At the end of 2008 we were not on the buy-side," Hogenboom says. "But now we are completely back on the property market."

In keeping with the common practice among Dutch pension funds to invest directly, Altera does not use leverage for its investments (it is allowed to use a maximum of 10% debt financing for a maximum of 12 months for the purpose of portfolio restructuring). In today's post-financial crisis environment this approach is very much flavour of choice among institutional investors. This core, pure-equity investment approach means that Altera has avoided some of the difficulties other geared funds in Europe have to contend with. "Our competitors had a lot of problems in the financing departments of their organisations and that was no issue for Altera. That made it, for us, a lot easier," van den Hoogen says.

In Hogenboom's experience, pension funds that invested in leveraged funds with opportunistic investment strategies are now focused on ungeared, core investments."They want organisations that have a very strong alignment of interest with the shareholders," he says. "We also see that they are a little bit more interested in their domestic market. In recent years they did not invest substantially in Holland, because their investment volume for real estate was very high and it was too expensive. So they went outside and now have to deal with a lot of stress management in these foreign vehicles."

Van den Hoogen adds: "In a way, you can say that this crisis made it clear for them [pension funds] that the Altera way of investing in real estate, with zero leverage and real core portfolios, is the best way. At least, if you take into account the low risk profile that pension funds are looking for."

For Altera, the main priority in dealing with the financial crisis and market volatility has been maintaining occupancy rates. The company's report and accounts, published at the end of 2009, show high levels across the four sectors: 94% for residential; 99% for retail; 94% for offices, and 93% for industrial. "Having such high levels of occupancy rates we are able to pay out our dividends as we did in the past," Hogenboom says.

The issue of sustainability, which the financial crisis has threatened to sideline, is still on Altera's agenda. Two years ago the company established its policy in this area, stating that all sustainable concerns would be integrated into its overall investment performance, rather than becoming a separate issue. It was also decided that it should have a neutral or positive impact on Altera's investment performance. A final conclusion was not to invest in technologies or systems that are not proven to improve sustainability performance.

Hogenboom explains how, through the Dutch association for institutional investors in real estate (IVBN), Dutch investors are now committed to addressing existing real estate, which is the biggest contributor to carbon emissions, rather than simply investing in new sustainable buildings.

But the Dutch institutional investor community is looking to use one system so that assets across the property sector can be compared consistently. "We would like to have one system of measurement of sustainability, because in that way you can compare parties and what they do in terms of sustainability," Hogenboom says.