Seize the opportunity

Austrian pension funds are adopting a strategy of broadening the investment horizon in terms of regions and vehicles. Barbara Ottawa reports

Currently, Austrian multi-employer pension funds only invest around 2% of their combined assets of €10bn in real estate. However, the recent turmoil in the markets is seen as an opportunity for new investments in this asset class with some funds planning to increase their exposure tenfold.

"I am not too worried about the current turbulence on the property markets," says Günther Schiendl, new member of the board at the €4.5bn VBV Pensionskasse, the largest retirement fund in Austria.

"It really is a good situation as many decision makers are nervous but with a good manager one can dare invest during a confusing situation in the markets."

At the €2bn OEPAG multi-employer pension fund, Walter Schmoiger, head of asset allocation, also hopes for new chances arising from the crisis. "So far, we have only invested in four objects but our aim is ten. However, we have not been able to find any opportunities as the European market has remained stable in the direct real estate sector so far as returns and economic development are concerned."
He adds that this might change with the slight downturn in the economy expected by many analysts.

OEPAG wants to keep to its strategy of only investing in European property outside Austria. "In Austria the market value is very high and the amount of objects traded is very limited."

In the past the fund has looked to Poland, Slovakia and Hungary but will now purchase an object in Bavaria/Germany and consider Sweden as a possible investment region to increase its exposure to real estate from 1.5% to 5% eventually.

Schiendl will turn further east to achieve his fund's ambitious aim to raise the property investment quota from currently 1% to 10% over the next years.

"Asia is our main focus as both illiquidity premiums and possible returns in Europe are too low to be attractive as core investments," he explains. All investments will be made in value-added or opportunistic vehicles, he notes.

Schiendl says: "Focusing on one strategy and diversifying this strategy by region and time horizon is better than fragmenting the core portfolio into various vehicles and strategies that might be very similar in the end."

Christian Böhm, head of the €2.3bn, multi-employer APK Pensionskasse, confirms he will also stick to the opportunistic style but "widen the investment universe". He continues: "We will look at infrastructure, timber and other real estate-related investment vehicles - but only if they are not too expensive."

Slowly increasing the property portfolio of currently 2% of total assets, the fund will be using all possible investment vehicles including REITs, closed-end funds, direct real estate and private equity.
 

From holdings in direct real estate Böhm expects "stable returns and a hedge against inflation" for his fund's portfolio. Schiendl also thinks directly held property is part of a good property portfolio mix and adds that the trend among several pension funds to divest from such holdings "probably is not the best way". Despite the optimism to be able to profit from the current crisis, none of the investments will be made straightaway as the market environment is as yet too unstable.

"The current situation on the markets is a crisis situation," Schiendl stresses. "We have to check carefully what managers can achieve and where their abilities lie." With the help of good managers, "investment strategies underneath the general radar" can be identified, he adds. "And those I like."

The former head of investments at APK sees the first window of opportunity for going into new markets at the end of the first half of this year. For distressed US real estate he sees interesting possibilities "not yet but soon".

The Austrian real estate firm CA Immo, with €3.5bn in assets under management, postponed its German REIT launch scheduled for spring this year because of the current market situation.

"In the current situation on the capital market, the lights are on ‘red' for new issues including REITs," says Bruno Ettenauer, member of the management board at CA Immo.

He notes that, fundamentally, there was no reason for a drop in value of real estate investments as interest rates are still low, there was no overproduction and inflation was only increasing slightly.

"The investment behaviour of banks is very influential," notes Ettenauer. He adds that a downturn on the real estate market was expected as it had been running very well over recent years.

Böhm agrees, whose analysts had cut APK's exposure to listed real estate at the right time before last summer, using the same argument of an imminent end to a cycle of outperformance.

Ettenauer is convinced the spread between the performance of prime locations and other investments will widen in the current market situation. "And it will be similar with real estate companies in the market - those with good fundamentals will recover and profit more quickly," he says. As for the market, Ettenauer notes: "Situations that heat up quickly also cool down quickly."

The REIT launch was postponed into "the second half of the year" depending on market developments. From Austrian institutional investors, CA Immo expects only little interest in investing in a German REIT structure.

For 2008 Schmoiger expects the new investments to return 4.5% but for the following years the 5% mark has to be cleared. "Vehicles that only return 3% are not a good opportunity," he adds.

VBV wants to generate two-digit returns from its property portfolio over the next years while the current rate of return lies somewhere between 3% and 5%, Schiendl explains.