A year ago, PKA was looking to invest in Asian real estate. Today, it is almost exclusively focused on opportunities in its home market. Richard Lowe talks to Nikolaj Stampe about investing in uncertain times

In times of uncertainty there is a natural human instinct to favour the familiar. This is clearly manifesting itself in the investment activity and intentions of pension funds in Europe.

While opportunistic fund managers appear to be raising institutional capital from Europe, promising to reap the rewards of distressed opportunities on both sides of the Atlantic, many pension funds are simply retrenching to their home markets, where they themselves have the knowledge and expertise to seek out opportunities.

Pensionskassernes Administration (PKA), which manages eight social sector pension funds and is the fourth largest pensions institution in Denmark, falls very much into this category.

The €15bn institution manages an international real estate portfolio with an exposure to a number of markets in continental Europe, UK, Russia and US, mostly through commingled funds. This section of its multi-asset portfolio currently makes up approximately 1.5% of total assets under management, but it is intending to double this exposure in the long-term. Its larger Danish real estate portfolio, which constitutes almost 12% of total assets under management and consists of directly held properties, is close to its target weighting.

In the second half of last year, Nikolaj Stampe, head of real estate at PKA, told IPE Real Estate that PKA would  continue to make new real estate investments both at home and abroad in the short-term.

However, moving through the first quarter of 2009, Stampe reveals that PKA is no longer looking to make any new investments outside of Denmark, certainly as far as 2009 is concerned (the exception might be to follow through with existing commitments and to consolidate existing investments). It will, in contrast, be looking for Danish investment opportunities this year, despite it being close to its target all ocation.

"I don't think we will invest abroad in 2009," Stampe says. "I am quite sure we will invest in Denmark, but that's because it is our home market. We understand it much better."

As a prospective buyer of Danish real estate, Stampe finds himself in a much stronger position today than he did even as recently as 12 months ago. PKA does not use leverage for its domestic investments and so in recent years the institution has invariably found itself priced out of a market by leveraged players.

"There are not so many buyers for the moment," he says. "What we are willing to pay for properties is not so far away from what we were willing to pay for properties last year. But last year it wasn't possible for us to buy them."

The outlook and repercussions of the current financial crisis for Danish real estate differ depending on the particular sector in question. For example, Stampe sees that part of the residential market in the country - specifically, older buildings - has effectively ground to a halt since leveraged buyers have withdrawn. The core office sector, on the other hand, has a relatively positive outlook, Stampe says.

"If you look at a core office building, it still gives you a normal cash flow and the crisis has not affected [it] yet," he says. "It will maybe come some day, but so far it has not affected anything. So, you've still got the cash flow and, if you don't have a leverage problem, you can still find these properties very attractive."

Although PKA does not use leverage in its domestic real estate investments, its international investments, which are mainly stakes in real estate funds, naturally include debt financing. "The biggest challenge for us has been the foreign investments, because of the leverage," Stampe says. "Our strategy is to sit and wait."

PKA is a member of the Danish Real Estate Club, which was set up by five of Denmark's biggest pension funds five years ago. Its purpose is to make it easier for its members - PKA, PenSam, Kommunernes, PFA Invest International, and Finanssektorens Pensionskasse (FSP) - to invest in overseas property using indirect vehicles.

PKA's international real estate portfolio currently comprises investments in the following:
-  Pan-European fund with exposure to office and retail sectors;
-  Russia fund with exposure to Moscow and St Petersburg markets;
-  New York residential fund;
-  Pan-US fund with exposure to office and retail sectors;
- Joint venture with fellow Danish pension fund Topdanmark, investing directly in Germany (currently limited to residential assets in Berlin);
- Danish property company investing in UK real estate.

The long-term strategy of PKA is to increase this section of the real estate portfolio. Its target allocation to international real estate is 3%, approximately twice that of its current level of exposure. However, this long-term drive is currently on the back burner while uncertainty surrounding the banking system, international property valuations and global economies has yet to clear.

Only a year ago, Stampe was looking at the possibility of investing in Asia. He reveals that at the time the pension fund deemed certain real estate markets in the region "intriguing", from both a diversification point of view and also because it "believed there would be some extraordinary opportunities".

India and Vietnam were, for example, two markets that were seen as very interesting. However, as Stampe says, the possibility of investing in Asian markets, along with other non-domestic markets, has been "put on hold for the moment".

Stampe admits that PKA has been approached by a number of fund managers selling opportunistic investment strategies that seek to capitalise on distressed real estate in other markets, including investments in real estate debt. But he is not interested in investing in real estate debt and any purchases from distressed sellers would only be done by PKA itself in its home market.

The only investment activity outside Denmark that PKA might take part in is "protecting" its current international investments. Not only are numerous real estate funds around the world feeling the pressure of a lack of debt financing, but they are also finding that some institutional limited partners are struggling to fund their capital commitments.
Hypothetically speaking, Stampe admits PKA may be willing to inject further capital into their current portfolio of funds, if it were necessary, because "we believe in them".

PKA itself has not struggled overly with the denominator effect (that is, where significant falls in values across equity and bond markets causes an investor's exposure to alternatives, such as real estate, to increase artificially and so potentially breach target allocations), which has had a restrictive impact on some investors to varying degrees.

"Of course, because of the value reduction of stocks and other things, the property has a relative higher part today than it had a year ago," Stampe says. "But it is our expectation that this is a temporary situation, so we won't reduce our properties because of the situation."

Stampe believes the biggest difficulty for real estate markets in general is the uncertainty surrounding valuations, in an environment where transactions are few and far between.

"The big question is: what is the right price today," he says. "The real problem today is no one knows where the markets are. That means the buyers are afraid to buy, because they are afraid to buy at the peak and a lot of owners won't sell because they maybe believe their properties have a higher value than the market accepts.

"I think there are a lot of buyers who expect a price reduction and they wait for that. And at the same time there are a lot of owners who expect the property to have a higher value," he says. "Until those parties have a more realistic picture of the situation, the market won't work effectively."

It could be argued that a large driver of valuation opacity is the uncertainty surrounding global economies and the impact they will have on the occupational market.

However, Stampe is adamant that the main cause of the problem is the degree to which real estate sellers are determined to stick to outmoded assumptions. It is this, he says, which causes the mismatch between buyers and sellers.

"The owners' valuations of the properties are being based on old expectations," he says. "And so it is maybe more of a question of updating the pricing expectations."
He adds: "The market has to accept where the values are. That is the biggest issue."