Publica, Switzerland’s largest public pension fund, is to begin investing in global real estate next year.
The CHF37bn (€34.1bn) [corrected] institution, which manages 20 pension plans, will begin by investing in core open-ended funds in North America and Asia, according to portfolio manager and strategist David Engel.
Engel told IPE Real Estate that Publica has established a 4% allocation to foreign real estate, in addition to its existing domestic portfolio made up of direct investments.
Publica intends to invest mainly in core assets, but will accept up to 10% of its allocation being in value-added investments, he said.
It will initially concentrate on open-ended funds with broad investor bases. The next step would be to act as a sole investor in a segregated mandate or also alongside larger investors in co-investment vehicles.
“In a final phase we would maybe consider closed-end funds, club deals or joint ventures.”
David Engel
It plans to be open to investing across a range of structures, but will take its time to “grow into the market”, Engel said.
“In a final phase we would maybe consider closed-end funds, club deals or joint ventures.”
Geographically half of the pension fund’s foreign real estate allocation is for North America, with 30% reserved for Europe and the remainder for Asia.
“Asia has high growth potential, but few established products,” said Engel.
“There’s a lot happening there though, so if at some point in the future we were to go further into foreign real estate that could very well happen in Asia – although it’s much too early to say now.”
The rolling out of its strategy is roughly split into two phases, the first being to build a broad diversified foundation of holdings in North America and Asia via investment in core open-ended funds.
This would complement Publica’s portfolio of Swiss assets, which will count towards the pension fund’s Europe allocation, according to Engel.
The second phase would see the pension fund award segregated mandates with a specific strategic focuses.
Before then the sector exposure of Publica’s international real estate portfolio will largely be guided by what is available in open-ended funds, said Engel.
Public had considered diversifying into global real estate before but only recently felt comfortable with the move.
“Back in 2011 we looked into foreign real estate but that at the time we felt that it was not sufficiently developed and that we didn’t have the capacity or capabilities to invest,” Engel said.
“Above all, it seemed very hard to us to reach the strategic goals we were after for that asset class. Since then there have been some changes.”
Publica now feels more able to handle the complexities involved in investing in real estate abroad, and that the product range is now good enough to do so, according to Engel.
“Real estate is also attractive from an asset-liability management perspective, and we have room for illiquidity,” he said.
“We believe that, with our size and internal resources, we can harvest what we call a ‘complexity premium’ in the area of international real estate.”
The pension fund intends to proceed at “a slow and measured pace”, however, he said, given the large increase in asset prices on the back of “the glut of money” pumped into the market by central banks.
Asked about the pension fund’s policy on taking into account environmental, social and governance (ESG) matters as part of its real estate investment, Engel said that energy efficiency has become an integral part of the economics weighed by any prospective buyer and that this is also how Publica views the matter.
Overall Publica is envisaging to implement its policy over a four to six-year time horizon, he said.
The move by Publica comes at a time when Swiss pension funds have been increasing their exposure to foreign real estate, albeit from a low base.
Earlier this year, Credit Suisse’s Pensionskassen index showed that investments in foreign real estate – both direct and indirect – had doubled over two years.
