Pensioenfonds Zorg en Welzijn (PFZW) - the Dutch pension fund for the care and welfare sector - is one of Europe's largest investors, with €13bn of real estate assets under management. The better-known investment management company, PGGM, is a committed long-term investor so while all regions are considered, careful macroeconomic scrutiny is the norm. Its presence in listed and unlisted real estate is to leverage maximum benefit from major economic shifts, as senior investment strategist Hans Op't Veld explains to Richard Lowe
Likening PGGM to a tanker ship is a comparison that senior investment strategist Hans Op't Veld likes to turn to on occasion. Indeed, this was the description he used at the IPE Real Estate Investor Forum in May, explaining to an audience in Berlin that the range of movement for the firm, with over €85bn pension fund capital under management, is very small. "We find it very difficult to assess real estate and make quick changes," he said.
Speaking to IPE Real Estate, Op't Veld reiterates that directing the real estate investment strategy of PFZW is like steering a massive cargo ship on the high seas: "You can move it one or two degrees, but you cannot turn it on a dime."
This is in stark contrast to the short-term tactics employed recently by the smaller German pension fund NAEV. In front of the same audience in Berlin, NAEV's Herman Aukamp explained how between late-2006 and the end of 2007 the pension fund executed a number of significant restructurings to its portfolio to take advantage of changes in economic and market environments. This included moving entirely out of the US REITs markets, increasing its Asian unlisted exposure, transferring Australian assets into cash and investing in niche products.
PGGM does not have the option to make such a fast play with large portions of its investment portfolio. Rather, as Op't Veld explains, it has to set up its investments in such a way that it can best capitalise on major market and economic shifts. "What we try to do is be smart about how we structure our portfolio, such that we have a maximum flexibility in taking advantage of our long-term horizon. That is one of the challenges in an illiquid market," he says.
PGGM benefits from having more than one way of gaining access to invest in real estate. Its global portfolio is made up entirely of indirect investments, but is roughly split 50/50 between listed real estate securities and non-listed funds, giving it flexibility in how it can gain exposure to chosen markets and also allowing it to capitalise on potential arbitrage opportunities between the two sectors.
"Our overall portfolio [real estate] is around €13bn, of which about 50% is in private real estate and 50% in listed real estate securities," he says. "Depending on what product is available we can invest in one of those routes. We have regional teams dealing with the private funds and we have a global real estate securities team looking at the development of the listed markets. So, we look at the relative pricing in both those markets and the availability of product, which allows us to take advantage of imbalances."
Part of PGGM's strategy is to position itself to be able to "profit from differences in relative pricing" between both listed and non-listed sectors. And the emerging divergence between the two sectors - ie, the listed sector seeing significant corrections in recent months while the direct markets, with the exception of the UK, look as though they are lagging - suggests there will be plenty of opportunities to do this over the coming months and years. "Most of the listed markets have repriced quite significantly, whereas in the private market it still has to come through," he says. "In the current market we feel repricing is a big issue to emerge in the US and also in Europe."
So, does Op't Veld think the UK market could act as a leading indicator as to what might play out in the continental European markets further down the line? "Certainly what we learnt from the UK experience is that the correction could happen quite quickly and you could see a repricing coming through in a couple of quarters," he responds. "That is something we didn't see before, but is something to watch out for. I think markets could turn quite quickly and you need to be prepared for that. We are considering that in new investments we make.
"When we look at continental European listed securities market we do see some significant repricing coming through. Now, that might be sentiment in part, but it is also, for us, an indicator to become a bit more cautious of how this market is going to develop."
PGGM also analyses the property derivatives market as a forward-looking indicator of the direct markets. "You get a sense of what the market is thinking and that is quite helpful in thinking about where might we be in one or two years," Op't Veld says.
However, in terms of investing through the derivatives market as a means of restructuring the portfolio, PGGM is still only "looking" at its potential. "It is an interesting tool that is out there," Op't Veld says. "It is obviously one that we can add to our toolkit. There is an opportunity to arbitrage the market using derivatives and in that sense it is a tool that is welcome. These instruments could help us actually structure our portfolio more efficiently and in effect move our portfolio more quickly if we wanted to.
"Having said that, it is an emerging tool and is still very much restricted to one or two markets. They are trading in various markets, but when you look at it, it is still fairly small and in that sense we have the disadvantage of being rather big. The typical investment size we are looking for already stretches the ability of the market to accommodate us."
Op't Veld explains how PGGM can take advantage of its position as a "long-term investor", to do things that other investors would not have the appetite or the long-term horizon to be able to cope with. It also enables it take positions that more leveraged players are finding they are no longer able to maintain.
"We can probably afford to sit on our portfolio and do things that wouldn't necessarily generate value for other investors in the immediate future, but over the long run will be attractive," he explains. "We see a lot of parties that have had to become sellers of real estate because of the market circumstances, because they were leveraged buyers or they were holding certain positions. It is interesting to step in when there is an imbalance to pick those things up."
But Op't Veld admits that for the time being the number of distressed situations are limited. However, this does not seem to tally with the number of opportunity funds raising capital with similar sorts of strategies in mind.
"It is interesting to see there is a lot of product being brought to investors by managers with regards to distressed assets," he says. "What we see is transaction volumes generally coming down, particularly in secondary markets, and so it is hard to predict the true size of this market. We see fund managers raising quite a bit of capital to do these distressed debt plays, but we have yet to see this actually translate into transactions."
Why haven't we seen these distressed opportunities? Op't Veld believes because this will only happen when "a number of these parties have to refinance and that will take a while to happen". He adds: "Obviously, the challenge is to gauge how much time it will take for the market to really recuperate.
"For instance, we would like to take over positions from sellers in existing funds, but we want to see the repricing coming through and that is not always the case. Not so many parties are in the situation in which they will have to sell. Also you would have to think about what these markets are going to do, in the sense of us being a long-term investor. The long-term view is more important than a short-term one."
PGGM is the epitome of the long-term investor, basing its long-term investment strategy for the PFZW scheme on fundamental macro-economic factors and 15-year outlooks for real estate markets around the world. Given the troubles in the global financial system and a more pessimistic economic climate, PGGM has been analysing its allocation and as Op't Veld says "looking at where we want to be in the long run".
He explains: "That really is the basis for our decision-making process. Essentially, we look at how economies are moving over time. We tend to look at GDPs of different economies 15 years out. That already gives you a flavour of what we are doing - in other words, we take a long-term view. We look at growing economies, countries where there is growth and value-creation in the economy and therefore value-creation in real estate."
Op't Veld remembers a time when PGGM had a "strong home bias" in its real estate investments. Today, of course, it manages an increasingly global and diversified portfolio of indirect investments - both listed and non-listed. The main thrust of this transition continues to do with increasing exposure to Asia Pacific.
"The portfolio is becoming truly global," he says. "We ventured out into the Far East a while ago, but within that region we are now spreading investments a little bit more and we are now much more comfortable investing there. We are leaving Europe more and more going into Asia, as I am sure a lot of investors are also doing."
Of course, to go "truly global" PGGM must look even farther afield than Asia, to the BRIC countries (Brazil, Russia, India, China) and it is. Even Africa could be on the radar. "The interesting development over the last few years has been that now no place is off limits any more. Mexico and Brazil are not as exotic as they were five years ago," he says. "But it has to be for the right reasons. Diversification is a valid reason to go into places where we haven't been before, if there is a sound economic rationale.
"The exceptions will be those markets where there is political instability and issues with human rights. We are now much more open-minded in terms of where we could invest potentially than we used to be. It doesn't have to be a market in western Europe where we speak the language anymore. That is changing."
But Op't Veld warns that investing in new markets simply as a means of "chasing yields" is something that should be view with caution. "A lot of investors went to places where there is rapid yield compression in the short term, but you have to wonder what the long-term prospects of these markets are," he says.
"That is something we need to be quite cautious about. We need to see the economic rationale as to why a market would work in the long term and not just offer a quick compression of yields overnight."
There are dangers in investing in emerging markets that are attracting huge volumes of capital, such as some of the markets in the Asia Pacific region. One of those is that the chosen market cannot cope with the influx of global investors.
"If you are herding into a market that cannot cope with the sheer volume, you are in trouble," he says. "So we are cautious of investing in places where there is a small market.
"An example would be India where there is a lot of investor appetite but relatively little product. Then you run the risk of giving too much away in terms of pricing, which might reduce your returns going forward. That is what we are looking at as well and product availability certainly isn't the same everywhere."