Denmark's ATP Real Estate is embarking on a new programme to invest €700m in real estate funds over the next three years. Managing partner Michael Nielsen talks to Richard Lowe about the challenges that lie ahead

As Denmark's largest pension fund, ATP is one of the country's biggest direct owners of property. It is also one of Europe's major players in the indirect, cross-border investment sector. Today, it has more than 30 investments in non-listed real estate funds in Europe and the US, valued at the end of 2010 at DKK7.8bn (€1.1bn) .

At the start of 2011, ATP said it would allocate a further €700m to new investments in Europe and the US through funds, club deals and joint ventures. In one sense the move can be considered an extension of its indirect investment programme rather than any kind of departure from its previous activity, demonstrating that ATP is keeping faith with non-listed, indirect real estate by directing a significant volume of capital to the sector. In a technical sense, though, the allocation is a new investment programme. ATP Real Estate, the pension fund's indirect property arm, established ATP Real Estate Partners I in 2006, an internal fund of funds structure through which ATP - as the only investor - has gained its exposure to the underlying funds; before this, ATP had invested directly. The new €700m allocation will be committed to ATP Real Estate Partners II, and the key members of the ATP Real Estate team will continue to co-invest as part of their incentive programme.

Michael Nielsen, managing partner at ATP Real Estate, says ATP Real Estate Partners II will be similar to its predecessor, which was concluded at the end of 2010. "We will more or less follow the same strategy and do it the same way," he says. That said, ATP has said that the allocation will be "slightly more conservative" and hold a "slightly larger allocation" to core real estate. Nielsen says this reflects the wider trend among investors to favour lower-geared, core real estate. "We have learned some lessons during the past two or three years," he explains. "We have seen a number of opportunity funds where it's more about financial engineering than, let's say, real estate returns. We have tried to change our focus and we want more real estate returns in our portfolio than returns generated from financial engineering."

But that is not to say that ATP Real Estate will be focusing only on plain-vanilla core products. The investor concluded ATP Real Estate Partners I at the end of 2010 with a $50m (€38.7m) commitment to The Townsend Consortium, a fund set up with the sole purpose of investing in Brookfield Asset Management's Real Estate Turnaround Program. The Brookfield strategy is to invest opportunistically in the US in underperforming assets or undervalued companies, and to embark on redevelopments, active asset management and financial restructuring.

ATP Real Estate has identified two other US funds for the new investment programme and it hopes to be invested during 2011. Nielsen is searching both Europe and the US for "attractive products", with the focus on Europe, predominantly the core markets of France, Germany, the Nordic states and the UK.

ATP remains cautious when it comes to central and eastern European markets, and it has not yet invested in Asia. When ATP Real Estate enters into a new region it prefers to build up a significant exposure rather than just dipping its toes in the water. Nielsen says: "It would not make any sense for us to allocate 10% or 20% of our €700m programme to Asia and only be able to commit ourselves to three or four funds. We want to be an active investor."

It is not a case of ATP not believing in the Asian real estate markets, but rather the desire to be in a position to invest significantly if and when it does. "It [Asia] will definitely be on the agenda again when we create our next programme," Nielsen says.

ATP Real Estate has three years in which to invest the new capital, but Nielsen will not rush into deploying it. "We have a few investments in the pipeline, which we will look further into during 2011. My best guess is that we will commit to three to four funds this year."

He adds: "Our focus is in the core segment. On the other hand, we have seen prices for core assets both in the US and Europe going up during the past 12-15 months. So whether we still have a window in which to move into core is something we will investigate and look into on every investment."

As for selecting fund managers, ATP Real Estate is looking at both its existing roster and new general partners. "We will have our eyes and ears open in the market, both to identify new managers but also to see what products our existing managers come up with in that period," Nielsen says. "It is not a target for us to have as low a number of managers as possible."

In addition to traditional pooled funds, ATP Real Estate will also be considering club deals and joint ventures. Nielsen says: "We are focused on with whom we invest. And we're not only doing due diligence on the manager, but also on fellow investors. Especially if we move up the risk curve into the value-added, opportunistic segment: we would not invest in, for example, funds with 20 or 30 investors. It is easier to handle that in the bigger funds where it's a core product, but for value-added and opportunistic products I am sure we will go for funds with fewer investors. In an ideal world we would like funds to have four to six investors who know each other and have the same mindset, views and strategy."