Club class

The Danish Real Estate Club of pension fund investors - which won the award for outstanding industry contribution at the IPE Real Estate Investor Forum and Awards in Amsterdam earlier this year bears testimony to the entrepreneurship and innovation applied to real estate investing by the pension funds of this small country of 5.4m inhabitants.

The club was formed in 2004, with five Danish pension funds joining together to invest in indirect property vehicles. A collaboration between PKA, PenSam, Sampension, PFA and FSP, the club is to invest €350m a year over the next three to five years in overseas property. The club structure allows members to collaborate on particular fund investments without the constraints of a fund of funds, such as sharing due diligence costs, knowledge and experience; gaining collective representation on fund boards; sharing market information and investment strategy.

So how do some of its members perceive real estate as an asset class? "Real estate is very stable - that is one of reasons why its value to us is so high," says Nikolaj Stampe, head of real estate at PKA. "We have invested €1.8bn in real estate which is about 12.8% of total assets."

PKA owns 80% of a real estate investment management company, Dan-Ejendomme, one of the largest of its kind in Denmark. It has nine institutional investors as customers besides PKA itself.

PenSam has only recently resumed investing in real estate after the tax position was clarified. An ALM gave a target allocation of 10-15%. "The main purpose for us is diversification."

There is much more to it than that for the €2.8bn Finanssektorens Pensionskasse. "Real estate has been the best performing asset class for the last decade double digit figures, with very low volatility of returns," says the fund's managing director Steen Jørgensen. He adds "We have 12% of our assets in real estate but we have a cap of around 15% because of its illiquidity."

After a long history of significant home bias in real estate investing many funds are now looking abroad for new opportunities. "€250m will be invested in international property, primarily in the EU and US," says Stampe. "We have US$50m (€39m) in a US fund and €50m in a European property fund. We also own a third of a UK real estate company Britannia Invest."

The Danish institutional investors have been quite active in the Danish direct investment market, according to Michael Nielsen of ATP Ejendomme. "A big part of Denmark's real estate is owned by institutional investors.

He adds: "There is very much a buy and hold strategy in Denmark. We don't have the same turnover in the institutional market as in the UK.

"The main driver is the size of the market - if you sell your investments you cannot be sure that you will get any new investments in your portfolio due to the low turnover in the market. This will make it difficult to maintain the real estate allocation. We have seen a number of institutional investors in the past having sold their residential portfolios. But I am sure the reason as in many other European residential markets is that the value of the holdings have really increased and they have simply realised their profit. The Danish market it is difficult for all institutional investors to get the required exposure to real estate so many of them over the past few years have been looking abroad."

Nielsen still knows a few investors who do direct investments outside their domestic market. "We only go the indirect route outside the domestic market and a number of small investors have followed the same route in the past year," he notes.

FSP has started to diversify into continental Europe and into the US with a target allocation of 25% of the real estate portfolio invested abroad. But Jørgensen notes that "for the time being the fund is reluctant to increase the percentage of foreign real estate because of pricing. But the planned increase in the allocation to real estate from the current 12% to 15% will be almost entirely driven by investment abroad."

FSP's investments in Danish real estate are managed in house; its foreign investments are through Real Estate Funds and quoted real estate companies. "We have made further commitments to six European funds and funds of funds," Jørgensen explains.

"We have a core-satellite strategy and we have now filled the core elements by investing in number of funds which are very diversified in terms of sectors and geographies, to give us a broad exposure. Now we want to find funds with a higher risk profile, mainly in Europe but we are also thinking of investing outside Europe, possibly in the US. We have to think more carefully about investing in Asia where the risk of making the wrong decisions is a lot bigger."

Most Danish pension funds focus real estate and mostly they want to increase the portfolio. However, because the actual prising for older residential property is relatively high, many institutional investors are tempted to sell.

More than half of PKA's real estate investment is allocated in residential property. Stampe notes: "One of the reasons why we have so much in Danish residential is because of many years of primarily focusing on it. But naturally our real estate investment strategy is much wider and more sophisticated overall."

Weischer explains that the fund's domestic real estate portfolio is almost entirely residential. "Some investments are 20-25 years old," he says. "The problem is that it is very hard to be flexible. If we want to sell we must offer to the occupiers first. There are also tax issues and tax status related to property if changes ownership loses tax advantages so makes very inflexible. So it is hard to get optimal allocation between sectors."

So what other sectors are being considered? Office and particularly retail is a very attractive stable investment, according to Stampe. "But you have to be more proactive with retail investments than with other classes of real estate - you must add resources to do it, otherwise it is no use," he explains. "Another problem about new investments is that, for instance, half the shopping centres in Denmark are owned by three major investors so it is rather difficult to build up a portfolio for other investors."

Almost all if not all the domestically held real estate is in the form of direct investments. However, we have the past month seen a number of funds who have put Denmark on their target list. "In Denmark it will take many years to shift from direct domestic into indirect vehicles," says Nielsen. "This is due to a tradition of ownership. But if you are quite a small investor you will not get the critical mass to have the right people on board to manage the portfolio."

Jørgensen explains that the attraction of direct investments as they started investing in real estate was the low cost base. "Investing in real estate has higher cost than most other asset classes - and I think that is still true," he says. "We have started investing internationally and we do that through funds, but that is necessary because we don't have the expertise to manage foreign direct investments ourselves."

The fund has in fact been invested in the UK for 12 years. "In our opinion it was the only liquid market in Europe," he says. "But liquidity has improved and in the last couple of years we have moved to continental Europe. A more liquid market place is the main concern.

"We have also moved to the US which is the most familiar and similar to European market. It is partly due to liquidity issues that we go for more familiar markets."

Gearing is an accepted part of the investment landscape. "Gearing increases the return on equity when done in a professional, skilled and conservative manner," says FSP. "In some of the funds we have a threshold of 75%. For example, in the UK would accept 75% because the market is more transparent and liquid than many."

FSP is a very focused organisation. "Although portfolio decisions are made in-house the management of portfolio outside Denmark always been outsourced," he says. "We decided that pension funds should be cost effective and that means a slim organisation. So we do the core activities in-house and non-core activities we outsource. That is the attitude among many pension funds in Denmark."

"Of course the biggest problem for institutional investors is that there are so many players in the market," says Stampe. "They act not always so much as property investors but as ‘economic artists'. "They may focus more on how to leverage investments and how to structure loans rather than on the property investment itself. The effect is that the prices are very and maybe too high."

Weischer highlights the supply problem. "In the case of other asset classes we define the mandate and then find the manager," he says. "In the case of real estate it is the other way round. They create the product and sell to the market. We can't define what we want and look for it. In one case we only got two thirds of what we wanted because it was over subscribed."