Denmark’s PenSam has made a residential equity investment in a DKK1.4bn (€188m) project.
The DKK105bn labour-market pension scheme said it expected to generate an internal rate of return (IRR) of 10-15% a year over the lifespan of the investment.
PenSam initiated the construction project itself, finding the opportunity and then approaching developers, following its Blue Ocean investment strategy, by which it aims to be involved in all aspects of a development, rather than just as financier.
The development on Teglholmen, a peninsula in the South Harbour of Copenhagen, involves three building sites, and work has already begun on the first 17,000sqm building.
The apartments are being built for sale rather than rental.
A new bridge is being built between Teglholmen and Enghave Brygge, giving a shortcut from the apartments to the city centre.
While PenSam did not disclose the amount it is investing in the project, it said the sales price of the finished asset should be DKK1.4bn.
PenSam is working with property developer Sjælsø Management and building contractor KPC on the project, with PenSam taking 50% ownership and the two partners taking the other 50% between them.
The project will use 50% leverage in the form of borrowing from banks.
Junior financing is being provided from PenSam to the two partners.
Benny Buchardt Andersen, PenSam’s CIO, said: “In these times, it would be impossible for the developer to raise construction financing on their own for a project this large.
“The financing in this case has only been do-able because PenSam is participating as an equity investor, and this increases the credit rating.”
PenSam expected to reap an IRR of between 10% and 15% annually on the whole investment, he said, which compared with traditional buy-and-hold returns, currently around 4-5%.
Buchardt Andersen said this was the first time a Danish pensions provider had invested jointly with a building contractor and developer in a new construction deal.
“All three of us have our shoulders to the wheel and an interest in actively putting our core skills to work, for mutual benefit,” he said.
This way of working together will produce a higher return at lower risk, which will in the end benefit PenSam’s pension scheme members, he said.
PenSam won the Portfolio themed award prize in the 2015 IPE Real Estate Awards for the way it constructed its portfolio and particularly because of its Blue Ocean model, seen as enhancing overall asset control.
Buchardt Andersen said the latest investment was a further development of the third phase of this strategy.
“This is an M&A approach we are going to use on all our alternative investments, giving us high absolute returns, as well as partnerships with skilled operational companies,” he said.
The approach differs from traditional alternative investment methods, which involve manager selection or the setting up of operational teams internally.
“PenSam uses external construction and development companies to find the best team for the project instead of having our own operational team, which couldn’t be the best on all projects,” Buchardt Andersen said.
“This way of doing things also gives us a leverage effect because we end up having several operational partners that can execute much faster than anybody else, and the best operational set up available for each individual project.”