Pension funds are finding buying opportunities in short supply at the moment, but are content to wait and watch for the right properties. Richard Lowe reports

NAME: Søren Ulslev
POSITION: Director
ORGANISATION: PensionDanmark Ejendomme
TOTAL ASSETS: DKK88bn (€11.8bn)
REAL ESTATE ALLOCATION: 6.3% (target 10%)

Danish pension provider PensionDanmark has been actively acquiring real estate in its home country for the past 12 months, including the recent purchase of five office properties for DKK1bn (€134m).

Transaction volumes in the Danish commercial real estate market were down in 2009 compared with 2008, according to Real Capital Analytics, which estimates total sales in the country amounted to €1.38bn. PensionDanmark has invested over DKK1.5bn in real estate, the majority of which has been commercial (85% versus 15% residential), during that period and early 2009, and so has not been driven by any ‘market timing' considerations.

"We have a fiduciary responsibility to invest our members' pension savings in a prudent way. Therefore, we must be - and have been - able to buy when attractive real estate is in the market," explains Søren Ulslev, director at PensionDanmark's real estate arm.

Ulslev's overall view of the Danish real estate market is that "it is still in a very tight spot with a limited supply and where many of the potential sellers hold on to their properties".

PensionDanmark has not only been active in its domestic market: in late 2009 it expanded its real estate investments by committing DKK0.6bn to a UK property fund. The fund, managed by Rockspring, will invest in commercial real estate in the Greater London area.

The pension provider is aiming to increase its real estate exposure from its current level of 6.3% to 10% during the coming years.

"Of course, it will be dependent on what will come to the market in the next two to three years. But we believe that it will be possible for us to invest an additional DKK 0.5-1.0bn a year in real estate," Ulslev says.

"In terms of type of commercial real estate, we are constantly on the lookout for top-quality office buildings with excellent location - especially where they are leased to sound tenants on long leases."

NAME: Brian Bailey
POSITION: Director of pensions
ORGANISATION: West Midlands Pension Fund
TOTAL ASSETS: £7.4bn (€8.5bn)

The West Midlands Pension Fund took advantage of the recovery in the UK real estate market to purchase an industrial unit and a supermarket in 2009, through its property managers ING Real Estate Investment Management.

But Brain Bailey, director of pensions, says the pension fund's view is that the market has become increasingly competitive. "If anyone's got a quality property to sell there are buyers out there, so the pricing is a bit aggressive," he says. "There are a number of institutions seeking opportunities, but there are not that many quality properties about."

Despite many fund managers talking up the current opportunities for investors in the UK market, Bailey says that owners that need to recapitalise are less inclined to sell their best assets. "There are not many distressed sellers of high-quality property. I think six to nine months ago we were all anticipating there would be. But naturally people don't want to sell their best property," he says.

There a number of opportunities in the market to purchase smaller real estate assets, according to Bailey, but these are often too small for the West Midlands Pension Fund.
He is also concerned about the medium-term prospects for commercial real estate outside the London area. "There will clearly be some areas of the property market that will take many years to recover. You've only got to look at some regional centres - the amount of voids in offices and shops and so on.

"It is going to be a long time before they come back," he says.

NAME: Hermann Aukamp
POSITION: Chief investment officer and director of real estate investments
ORGANISATION: Nordrheinische Ärzteversorgung (NAEV)

German pension fund Nordrheinische Ärzteversorgung (NAEV) thinks there is the potential for investment in real estate in the future, but Hermann Aukamp, CIO and director of real estate investments has a fairly cautious outlook. He says there might be some chances to invest going forward but the pension fund is "still reluctant".

He adds: "We are not very aggressive currently. We still see vacancies going up, rents coming down. Even if there are some markets which might be in equilibrium, the overall situation is not in favour of heavy price increases. Financing is still not available to the extent that people are used to."

Aukamp believes debt financing will be crucial for the success of new real estate funds and existing vehicles. This situation itself may present opportunities to investors like NAEV, but Aukamp says he doesn't "see any need to rush".

One region that the pension fund is now steering clear of is central Europe. "We don't think it is safe at the moment - even when rents went up significantly," Aukamp says.
Aukamp also perceives "some weakness" in the prime markets like France, despite an obvious upturn in interest there. "Prime seems to be a safe haven for many people and we don't think yields for prime properties can stay as low as they are now for a very long time," he says. "When interest rates go up it is very difficult to trust these very low yields on prime property. But as in every cycle it was a flight to safety and a lot of demand concentrated on prime and long leases."

Aukamp admits France, Germany and the UK are the most interesting markets and "are safer now". But he doesn't believe investment performance will be strong before the first half of 2011. "It is a very modest view and is from the general economic situation," he says. "We see companies being reluctant to get more space."

One area of interest is German residential where there is continued housing demand.