Founded in 2001, the pension fund of VRT, the public broadcasting company of Belgium's Flemish community, has €430m total AUM. However it is not short on robustness in its approach. As is common with funds of this size, equities are the mainstay of VRT's property allocation, as its manager, Florent Verberckmoes, explains to Martin Hurst

What role does real estate play in your portfolio?

The management of a pension fund requires a long-term approach using strategic management tools such as the ALM study. We also want to reduce the risk to the fund of unexpected rises in the rate of inflation via - among other things - real estate. Non-diversification and concentration in shares and bonds means greater instability and hence uncertainty.

What is your current real estate allocation size and composition and can you give the reasons behind this? What impact has the current ‘credit crunch' had on your view of present and future allocation/composition - of the overall attractiveness of real estate as an asset class?

The portfolio is in European real estate, both continental and UK. Diversification is ensured by managers who identify companies with growth potential. Important criteria for the selection of healthy companies are a sound business plan, sufficient own resources and a good finance plan, while current and future value is assessed on the basis of an analysis of the underlying real estate.
Factors that are monitored are leasing agreements (because they are index linked), raw materials (which fuel inflation) and infrastructure (because this generates income). Naturally, the ‘credit crunch' has an impact on growth potential because it dries up companies' source of financing. Banks have become more restrictive, and as a result this inexpensive lever has fallen away. In the long term the wheat will be separated from the chaff.

Do you have a view of direct versus unlisted versus listed (funds, securities) or closed- versus open-ended funds? Do you have a view of property derivatives?

I nvestments are only made in listed shares with a closed-end fund character. There is no mandate to make use of derivative products. The investment guidelines stipulate that derivatives may be used to reduce risk, but may not be used in an attempt to increase yields (via leverage, for example).

What is your view of the level of  corporate governance in real estate investing? Do you have enough clarity/transparency for your investment decision making? What challenges do managers still face in this area?

The managers have been given a mandate which obliges them to adhere strictly to corporate governance when giving form to policy. As far as the pension fund is concerned, corporate governance means that the interests of the investor and the managers of the company have to be aligned.

We examine the following points: What is the structure of the company? Are there market-rate fees? Who are the shareholders? Who is a member of the supervisory board? What shares are issued (with or without voting rights)? What is the structure of the audit committee and the remuneration committee? It is important to have investments in the main listed market, where there are strict transparency requirements. We are not a major player and are therefore not obliged to draw upon the private market; we invest in stock-exchange-quoted real estate. The European Public Real Estate Association gives asset managers a great deal of support and as ultimate investor we enjoy the benefits of that.

What challenges do real estate investment managers face in terms of the overall quality of their service offering?

As a client it is important for us to be able to work with expert managers. Their experience must be of benefit within the framework of the fund as a whole. This is only possible if there is a relationship based on mutual trust. When there are market corrections - as there are now - good, regular communication and sound advice are important.

What is your view of the importance or otherwise of sustainability in real estate investing?

We attach great importance to the energy issue. A pension fund has a great say in the areas in which its investments are made. Ethically sound investments and sustainable investments, in the form of ‘green buildings', are clear choices that can be made. We believe that companies that bear criteria such as the environment and sustainability in mind will generate better long-term results, and this approach is gaining in importance.

What role do investment consultants play in your real estate investment decisions?

Investment consultants are the link between the pension fund and the manager, and  they can play an important role. Earlier this year, the VRT pension fund decided to terminate its collaboration with Watson Wyatt because it was felt to be no longer advantageous. A consultant must think along at a strategic level and contribute at that level, not at the operational level. The pension fund needs good partners with whom it can jointly devise a long-term strategy; we need to have a picture of the whole landscape and of our position and performance within it with regard to our peers.

What are the key challenges facing you as a real estate investor now and in the future?

At the moment we have to keep a cool head and have faith in our investment positions. Because of the credit crunch, the markets are driven by uncertainty and are consequently less rational. The longer this lasts, the more damage is done. The heart of the financial system is the trust that it will continue to function, and we have faith in the operation of the capital markets. Our pensions have to be paid out of the yield generated by our assets, and as an investor one has to ask oneself questions in the light of market developments and the reaction of various parties.
For a pension fund the fundamentals are important and we believe that these should be evaluated thoroughly. The past has shown that financial crises in themselves are seldom - if ever - enough to undermine the real economy.