There is still substantial appetite among Nordic pension funds for non-listed real estate investments, according to a new survey by Lymos BV Real Estate Capital Advisors. Mariëtte Meulman explores the report's findings

For the second year running, Lymos BV Real Estate Capital Advisors conducted a study into the non-listed real estate investment strategies of pension funds in Norway, Sweden, Denmark, Iceland and Finland.

As the study found last year, the pension fund industry still is a relatively closed world. There is little literature available about the industry and the information on strategic plans and asset management is particularly scarce.

Last year, the credit crisis put considerable pressure on the returns on investments in many asset classes. Non-listed real estate has proved its value in the diversification of investors' overall portfolio.

Pension funds' exposure to investments into real estate assets has increased. More importantly, the study shows that the financial crisis has so far not significantly affected the pension funds' real estate investment plans. Their real estate investment strategies have hardly changed.

Desire for non-listed real estate
There is still a great appetite for investing in non-listed real estate assets. The requirements of pension funds in this area call for further analysis, particularly as available information is scarce.

According to the study, 53% of pension funds in Norway, Sweden, Denmark, Iceland and Finland will be investing in non-listed real estate in the coming years.

Last year, these pension funds had planned to increase investments in this area by 12% in the next five years. The financial crisis changed this. Most of the pension funds continued with this plan based on the wish to achieve a worldwide spread, while others, although they do have plans to increase investments in non-listed real estate, have put everything on hold for the time being.

The study found that 15% of pension funds had already increased their exposure to non-listed real estate and already met their set targets. The remaining 31% either had no real estate assets and did not plan to acquire any, or would invest in direct real estate assets.

Active shareholder role in non-listed funds
Among pension funds in Norway, Sweden, Denmark, Iceland and Finland 35% are passive shareholders, while 65% are active.

This is a very substantial change in attitude compared to last year. Pension funds stated that they monitored and managed these funds, which are mostly growing in size, more actively. Others stated they would start managing these holdings more actively in the future.

As a reason for this change in attitude, pension funds mentioned lessons to be learned from the credit crisis combined with the increased volume of capital invested in non-listed real estate funds.

Regular monitoring of returns
Pension funds in Norway, Sweden, Denmark, Iceland and Finland describe their involvement in non-listed real estate holdings as very active, in that they regularly monitor returns.

Having said that, 70% of pension funds said they do not perform a financial hold/sell analysis and 42% do not perform a strategic hold/sell analysis. Of the pension funds that stated that they do not carry out a strategic hold/sell analysis, nearly all said they were addressing this issue to ensure these analyses would be taking place.

Some are studying means of putting this into operation, such as the type of model needed. The pension funds that already perform a strategic hold/sell analysis are stepping this up to a yearly, half-yearly or even monthly exercise.

Terminating fund investments prematurely

Most of the pension funds in Norway, Sweden, Denmark, Iceland and Finland do not consider terminating their investments in closed-ended, non-listed real estate funds prematurely.

This is because (internal) political reasons seem to have a greater impact than the rational arguments used by investors. However, a slight shift can be observed here compared with last year. A few pension funds did dispose of a holding prematurely with positive results, while another fund stated it was actually considering doing so.

Looking at the trends in non-listed real estate investments strategies of Nordic pension funds, the conclusion is that there is still great appetite for investing in non-listed real estate assets. Nordic pension funds are much more actively involved in their shareholder role in non-listed real estate funds, due in part to the greater amounts of capital invested and as a result of the lessons learnt during the global credit crisis.

For the same reasons, pension funds will more regularly monitor the results, and those pension funds that do not carry out a strategic hold/sell analyses yet, will address this issue to ensure these analyses will be taking place.

Even when pension funds expect that internal rate of return criteria will not be met, or they are overweight in some sectors, they may miss out on opportunities to generate alpha in favour of maintaining business relationships and access to new investment opportunities. This situation currently seems to be changing slowly, possibly indicating a new shift in a relatively recent trend to invest in non-listed real estate.

Mariëtte Meulman is a director at Lymos BV Real Estate Capital Advisors