Road to Russia

Investors look East as Europe reaches saturation point; Norwegian real estate remains bullish and Aberdeen launches a bespoke vehicle

After months in the offing, specialist Russian real estate funds from European managers came two at a time. Aberdeen's fund marked its first foray into the Eastern European real estate market - a bold regional entry, to say the least. The target €1.5bn fund, with a "value-added to opportunistic profile", will focus exclusively on office. A second US fund from Heitman has a target size of $150m (€104m).

But will pension funds go for them? There has long been more than one way to acquire a dacha. Finnish pension funds have already gained exposure to Russian real estate via indirect investment in domestic property companies such as Sponda, which aims to have €200m - around 10% of its total investments - in Russia by 2009.  Among Sponda's major shareholders are the €11.4bn Finnish state pension fund (VER), with 0.63%, and the €690.8m Merimieselakekassa (Seafarers' pension fund), with 0.08%.
Yet Henrik Lilius, investment director of the seafarers' scheme, claims Russian real estate offers an investible market - at least indirectly - and brushes aside suggestions that there are still obstacles, including pricing, to be overcome. The fund invested around a year ago in an unspecified fund, and has no intention of investing directly in that market. 

The green, green grass of home
New Russian funds are hardly indicative of a greater transparency in that market: they're rather the result of saturation of more and less mature Europe. Yet despite the move eastwards, European property markets have not run out of opportunities altogether. Recent fund launches have effectively reprised earlier themes, including optimism over Nordic property markets, notably with a Cordea Savills Nordic retail fund.

The fact that the themes are familiar doesn't mean there isn't still investor appetite for them. However, Mats Hederos, head of real estate at AMF Pension, the SEK 264bn (€28.6bn) Swedish pension fund, is cautious at least about its domestic property market. "We've looked at the real estate market over the past few years and we've been sell-side rather than buyers," he says. "The market's too hot for us - which isn't to say it's overvalued, but it was a good opportunity to sell."

The scheme last year announced that it planned to double its 6.5% real estate allocation. Hederos last week confirmed that this was still the plan. "We're still thinking about it," he said, "but the heat isn't on". When the fund invests again, it will continue to invest in office and retail.

AMF may be an exception. For one thing, it invests exclusively in its domestic real estate market. "We're part of an insurance company, we aren't trying to diversify. It's a local business, and the rule is to keep it local if you don't have to do something else. It's quite simple: we're looking for concentration," says Hederos.

For another, its property investments to date have been direct. "We could invest indirectly but we haven't seen the advantages so far. We're too small," he says.
"There won't be an immediate change - not as I see it now. We want to have an influence, if not total control."

Similarly, Telenor Pensjonskasse has to date resisted investing outside its native Norway - a choice made easier by merchant bank Close's recent prediction that the market would outperform the rest of Europe for the foreseeable future. Real estate makes up 12% of the portfolio - all direct and all domestically invested with a single company under a sale-and-leaseback deal.

Although the fund has not ruled out investing overseas, it is in no hurry. "I'm neutral right now. I consider that we'll have to look into it but it'll take some time," says Tom Jarneid, chief investment officer of the NOK6bn (€747m) scheme. Nor did Jarneid rule out an eventual move into indirect investment - "but not for the moment".

Even the UK is still seeing some residual domestic interest from pension funds. As fund managers such as Cordea Savills look to opportunistic sub-classes such as "strategic" greenbelt land with a fund launched in October, investors such as the Berkshire local authority pension scheme are continuing to resist the pull of overseas markets.

The £1.4bn (€2.1bn) scheme recently switched from direct to indirect, selling off some of its direct holdings for a £15m investment in BlackRock's UK property fund.
Investment manager Nick Greenwood said: "It isn't a new move. It's just a move from direct into indirect because indirect allows greater diversification." 

With the move into indirect, domestic property makes up around 80% of the fund's 10% allocation. Despite the recent move, Greenwood did not rule out a move out of UK property depending on decisions made at an upcoming actuarial review. Public-sector pension funds in the UK are under a regulatory obligation to undertake such a review every three years. "It would be perverse to start moving before the review," said Greenwood.

A fund of one's own
Aberdeen has been busy. Not only did it enter the Russian market but it also added to its portfolio of bespoke funds designed for specific pension funds - the latest, a pooled property fund set up for Swedish insurer Folksam and its separate pension funds across several markets. The initial investment capital is more than €100m, distributed equally between European and Asian sub-funds.

Will the bespoke model take off? Aberdeen has already created bespoke funds for pension fund consortium, and developed portfolios for Swedish state pension fund AP3. In January this year, it set up a Finnish property fund specifically for Ilmarinen, the €21.6bn Finnish multi-employer pension scheme, Dutch pension fund ABP and the €49.6bn ATP.

A cautious build-up and pension fund control, it seems, are key. "It's been a long period of cooperation, and we'd already outsourced our property management to them," says Esbjörn Wincent, Folksam's head of alternative investments. "It's a vehicle for the group and it's important that we have the power to decide whether or not to invest. The fund manager provides the skills for the day-to-day operational role." Asked whether he saw traction in the model for other employers with subsidiary cross-border pension funds, Wincent replied: "It will certainly increase. This will be a major route for investment."