The German pension fund for lawyers in the state of Hessen has written down €57.9m invested in the Transamerica Pyramid in San Francisco alongside Bayerische Versorgungskammer (BVK), which manages €117bn for Bavaria’s professional pension funds.
Versorgungswerk der Rechtsanwälte im Lande Hessen said in a statement that it invested in the renovation of the Transamerica Pyramid to benefit from a recovery in the US office real estate market following the COVID-19 pandemic and to further diversify its overseas property portfolio.
The initial investment of $50m was secured by subordinated equity of around $300m from other investors, in particular BVK.
A further $17.2m was deployed in 2023 to continue the renovation, reflecting rising construction costs during the pandemic and adjustments made as part of the building’s repositioning.
However, rising interest rates and increasing construction costs further strained the office market, while demand for office space remained significantly weaker than initially anticipated, the pension fund said.
“As a result, the Transamerica project cash flow became negative,” according to the pension fund’s statement. The scheme declined further funding commitments required in connection with a large-scale lease that would have further increased costs.
BVK, the main investor in the project, covered additional capital requirements through a new equity tranche ranking above the Hessen pension fund’s investment.
At the beginning of this year, BVK decided to sell the Transamerica Pyramid for a price insufficient to service the lawyers’ pension fund’s preferred equity.
According to reports, Cyprus-based investment firm Yoda agreed to acquire the building for $700m.
Deutsche Finance Group, real estate developer SHVO and an institutional joint venture involving BVK acquired the building in 2020 from a subsidiary of the Dutch insurance group Aegon for $650m.
Renovation costs amount to €250m, a spokesperson for real estate developer Michael Shvo told Green Street News.
BVK disclosed write-downs of €163m for the 2024 financial year and has warned of the risk of a further €690m in losses linked to development and renovation projects.
Lessons learned
The Hessen lawyers’ pension fund has launched an investigation to “systematically evaluate the experiences” from the investment and draw conclusions for future decisions.
Existing auditing, decision-making and risk management processes are being “analysed in this context” and may be further developed, the pension fund said.
Investments by professional pension funds, or Versorgungswerke, have recently raised questions about governance structures and investment processes.
The investment in the Transamerica project followed a structured, multi-stage review process, the fund said.
The board commissioned an independent analysis from a US-based consultant to assess market developments in San Francisco. The analysis assessed the project positively but warned of risks associated with the COVID-19 pandemic.
Against the backdrop of increasing uncertainty in real estate markets, the pension fund commissioned a further, more in-depth analysis. This concluded that the increased risks outweighed the potential benefits of an equity investment.
As a result, the pension fund decided against taking an equity stake in the project, opting instead for preferred capital with a comparatively lower risk profile. The terms included a fixed, accumulating coupon of 8%, as well as additional profit sharing.
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