With Russia and Latin America in the sights of German pension fund NAEV, Hermann Aukamp tells Richard Lowe about finding the right products once a market has been identified

Nordrheinische Ärzteversorgung (NAEV), the pension fund for medical professionals in the German federal state of North Rhine Westphalia has close to €9bn assets under management, of which 14.4% is allocated to real estate. NAEV started to invest in property outside Germany 10 years ago and global diversification is an objective that the fund continues to pursue on an ongoing basis.

Emerging markets play an important role in this international investment programme. For example, the pension fund is currently invested in a number of Central and Eastern European (CEE) markets and has already built up an exposure to real estate in Asia Pacific. NAEV is more advanced in its investment programme in the CEE, to the point that it is looking to make some disinvestments from individual Spezialfonds in Prague and Warsaw.

"It is still a good time to sell in Poland," says Hermann Aukamp, chief investment officer at the pension fund. "Obviously, we will go back into these markets some day, but for now we see quite a good exit in these CEE markets."

In Asia, NAEV has made commitments to a number of funds targeting Japan, China, Hong Kong and Singapore, and is already making some disinvestments in the South Korean office market. Many of the funds NAEV is invested in are in the process of deploying capital and the pension fund is not looking to make any additional commitments to the Asia Pacific region in the short term.

Aukamp believes that the Indian real estate market is very "difficult" and is steering clear of it for the moment, despite having previously invested in some mezzanine financing there. He is wary, for example, of the recent volatility of India's listed property companies."We see all these problems on the listed side in India," Aukamp says. "We still see a lot of growth, but we decided for the foreseeable future not to extend our reach in Asia."

But NAEV is looking for new real estate opportunities on an increasingly global basis and Aukamp has identified a number of emerging markets around the world. For example, the pension fund has been assessing opportunities in Turkey, where Aukamp has seen a number of funds focusing on retail property investments. But given the prospect for potential oversupply in the sector, the fund has decided  not to invest for the time being.

"There are large shopping centre funds and funds focusing on retail in Turkey," Aukamp says. "But when we did our research we found that there might be over-building in retail malls in many cities, so we are a little bit reluctant to step into Turkey now."
Two destinations that are more likely to see investment capital commitments from NAEV in the near future are Russia and a number of markets in Latin America.

Aukamp reveals that he is currently looking for the right products to gain exposure to Russian real estate, but has yet to identify the right one. In addition to finding the right general partner for Russia, Aukamp is quite particular about which sector he wants to invest in - residential. He likens the residential situation in Russia to that of Warsaw and Prague around five years ago, and the pension fund is determined to tap into this particular demand rather than invest more generally in Russia.

"We don't think it is offices," he says, talking about the various real estate sectors in Russia. "We would like to go into housing and development of housing in St Petersburg, Moscow or some of the provincial cities. We think housing would be quite interesting, because there is a big demand for modern developments."

Unfortunately for Aukamp, he has not yet found the right vehicle to satisfy NAEV's requirements. "It is difficult to find the right product," he says. "We haven't found a fund that has suited us regarding residential development." But Aukamp is confident he will start seeing suitable residential-focused funds by the end of the year.

NAEV is in a similar position regarding Latin America, having a desire to invest in a number of markets in the region, but is currently assessing the market for suitable funds. Aukamp says he is considering markets like Chile, Mexico and Argentina, but the front-runner in terms of investment appeal is Brazil.

"We see a strong currency in Brazil," he says. "The economy is commodity-driven, but the economy in Brazil is in quite a good shape. Its growth, its demographics [are appealing] and it is a huge country, a big market."

So far, however, Aukamp is seeing less funds than he would like focusing exclusively on Brazil. "We are looking for several funds concentrating on Brazil," he says. "There are some products available, but some of these don't concentrate solely on Brazil but rather are a mixture of Mexico and Chile."It is not unlikely, he says, that NAEV will eventually invest in a fund that is, for example, invested in 70% Brazil and 30% in Mexico and Chile.

Aukamp is keen on Mexico too, not least for its positive outlook regarding currency and demographics. But he recognises that Mexico is different to Brazil and is closer to the US both geographically and in terms of development and maturity of its real estate market. Having said this, he expects both Brazil and Mexico to be the most important property markets in Latin America over the long-term.

"Many parts of Mexico are more or less like the US, with quite developed regions where you can invest in housing, retail and industrial," he says. "We see these markets as quite substantial in the long run."

Aukamp explains that the motivation for investing in markets like Brazil and Russia is twofold - gaining access to higher returns, and achieving greater diversification within the portfolio. While it is normal for initial investments in new markets to be very modest, Aukamp believes they are still very much worthwhile even if only to "get to know these markets", since they are "part of the property universe".

But the CIO is also happy to take the necessary time to make the decision to invest on a prudent basis; he is happy to enter the market following the first wave of short-term opportunistic investors.

"We will not be frontrunners," he says. "But sometimes it is good to wait a little bit longer - definitely in these markets - and be a little bit more cautious."