The fact that PFA Ejendomme is invested in three development projects does not mean it is going all-out for risk. Director Michael Willumsen tells Shayla Walmsley why the pension fund subsidiary is sticking with core

If there were such a thing as trophy development sites, Copenhagen's Carlsberg site would probably be one. So when Michael Willumsen, director of PFA Ejendomme, the real estate subsidiary of the DKK284bn (€38bn) Danish private-sector pension scheme, plays down the June acquisition of a 19.9% share in a development on the site of the former brewery, it comes as something of a surprise.

For one thing, he says, it is just a small part of the scheme's DKK12.7bn domestic real estate portfolio. (International real estate investments account for a further DKK1.9bn.) For another, it has no intention of expanding significantly outside core office.

"The fact that we're investing in development projects doesn't mean we're shifting our focus away from office. You have to put it into the context of the overall asset allocation," says Willlumsen. Development investments make up less than 5% of the total portfolio.

"We haven't left core behind. We're aiming to invest in office but, especially given the size of PFA, when you look at the market and the competition, it's difficult to find assets of the quality we want to invest in. So we invest in development as a tiny part of our total investment volumes."

While the investment focus is still on Copenhagen, and still on office, there are a couple of caveats. Willumsen says much of the appeal of the development site comes from the potential to build residential on it.

Copenhagen's population has grown by 10,000 over the past two years, and the acquisition aims to exploit that rapid expansion. Roughly 10,000-12,500 people will move to Copenhagen each year for the next 20 years. "There's a good outlook for Copenhagen, especially in terms of the population and its residential needs," he says. "It could be a very good investment opportunity."

To date the brewery acquisition has been the highest profile of PFA's development acquisitions. But it is not the only one. A second development project comprises a 12.6% share acquired for DKK123m in a development project in a former shipyard site, Refshaleøen, in the northern part of Amager (Copenhagen and Christianshavn).

So it is equally surprising to hear Willumsen say that, not only is the pension fund not currently invested in residential, it has no plans to be any time soon. "We haven't changed our mind about residential. We are not in it. I can't guarantee we won't invest in it in 15 years' time, but we have no plans at present because the total return, compared to office, is too low," he says.

"It's important to me that both of these sites will have around 50% residential building rights, but there's a huge difference between developing and owning a property - and we won't be owners. We will sign off after the development phase."

Unsurprisingly, PFA's development projects are relatively low risk, but one of the most significant risks is the time it will take to develop the sites. The brewer, which sold the shareholding to PFA, will retain 25% of the project, and development of the 570,000 sqm Carlsberg site is expected to take 20 years.

"There's a lot of basic risk associated with development timelines - but given our expectations of what will happen in the city, a lot of the risk will be removed," says Willumsen. In any case, he says, he would classify Carlsberg and Refshaleøen as value-added, rather than opportunistic, because they are not highly leveraged.

This will not be the first time PFA Ejendomme has invested in low-risk development projects. It invested DKR660m in developing a new Copenhagen building for a subsidiary of pharma Novo Nordisk. That project Willumsen describes as "risk free" because the tenant and the construction firm were already in place when it came into the project.

A similar development investment came via Norden K/S on a property-by-property basis. A deal signed in May with the EjendomsSelskabet Norden IV K/S, owned jointly by its management, PFA, ATP and Industriens Pension, gave the vehicle Copenhagen's SCALA building for DKK300m, with an additional DKK500m earmarked for development. The asset comes with significant building rights.

All this development, but no real change? That is pretty much how Willumsen sees it. Neither the allocation nor the strategy will change significantly unless there is a compelling reason for the scheme to change it.

"We won't be changing our allocation significantly in the near future. In terms of the [parent] PFA pension scheme, 5.6% is allocated to real estate. We'll be increasing that - hopefully - but we haven't got a target. It will be driven by the market and the opportunities," he says. At the end of July 2011, the PFA group had investments of DKK14.6bn in real estate, DKK11bn in direct and DKK3.6bn in indirect.

"Core is where we are and where we want to stay," he adds. "I could say we'll invest 5% in value-added, but that's partly been filled up with these developments. The approach is basically unchanged."

PFA is waiting for a macro recovery as the driver of future office yields attractive enough to make up credible investment opportunities. In the meantime, Willumsen has been focusing over the past three or four years on renegotiating leases for, and re-letting, the office assets it already holds. He attributes the portfolio's low vacancy rate - 4%, compared to a 9% Copenhagen average - to rigorous due diligence on the creditworthiness of its tenants. "So far we've had no losses whatsoever," he says.

Not that Willumsen plans to relax the due diligence when the market improves, but neither is he waiting for the wind to change or chasing after high-risk propositions because low-risk ones are hard to come by.

"In a year or two or three, there will - hopefully - be new construction and lower vacancy rates overall. In the meantime, our focus is on being a property owner - on working the asset," he says.