Greater than the sum of its parts?

The Danish Real Estate Club, set up by five of Denmark's biggest pension funds, has now been in existence for nearly three years. Its purpose is to make it more efficient for its members - PKA, PenSam, Kommunernes, PFA Invest International, and Finanssektorens Pensionskasse (FSP) - to invest in overseas property using indirect vehicles.

Ideally, the five members should enjoy the best of both worlds, sharing advice, lower costs and information on the property market, while investing separately in unlisted property funds.

The Club now has €400m of property investments outside Denmark, stretching across western Europe from Birmingham in the UK to Madrid. It is also expanding its horizons beyond the continent, and last year bought into two Asian property funds.

In 2006, the Club invested around €300m, and it expects to spend around the same amount each year.

So have its members' expectations been met?

"From my point of view, the Club is doing very well and provides great value," says Nikolaj Stampe, head of property at PKA. "It reduces our costs and at the same time acts as a discussion forum before we invest. PKA is starting to look at property markets in countries which are new for me. So in that way it is really good for us."

Stampe says that it is not just a question of reducing cost, but of making the investment process more effective.

The Club has an investment service agreement with global real estate advisers Cushman & Wakefield, although each member invests on an individual basis.

"It has worked out pretty well," says Bryan Laxton, head of UK capital markets at Cushman & Wakefield, who heads up the firm's indirect investment side. "But on a day-to-day basis, it works differently from what was anticipated, and has ended up as a more streamlined process."

The Club is run by a committee, each member having a seat. The committee members meet Cushman & Wakefield three times a year.

At the meetings, the advisers run through their house view on property markets on a generic basis, such as Asia versus US markets, or industrial versus retail.

"We keep an eye out for all the opportunities fitting the members' criteria, although this means five different strategies and types of fund," says Laxton. "The meetings we have are about how we can improve what we're all doing. But if a member says they need to talk to us about vehicle X, that is done separately. However, it's easier for us to deal with the same group than with five separate clients. The Club has done around 10 deals through us this year."

Laxton says the fee arrangement means costs for Club members are lower in total than would be the case if they were dealing with the firm individually.

And he says that the group's size can give it clout over investment fees paid to fund managers.

"It generally works on the basis that the more money invested, the lower the percentage fees," he says. "In terms of the investment itself, if someone has come in with a cheque for €5m, they will not get any discounts from the vehicle manager. But if they are investing €60-70m, they could get a good deal on fees."

Apart from any specific financial benefits, Laxton says the Club also makes its members more attractive to the seekers of equity. "We know the Club, and they know us, so with a new fund provider, the first deal is always difficult, but after that, it becomes easier," he says.

Each member has its own strategy and where their strategies and requirements coincide, they may invest alongside each other. However, there is not a single vehicle which has been invested in by all five Club members.

Ubbe Strihagen, international director, Aberdeen Property Investors, based in Stockholm, agrees that there are both pros and cons for Club members.

"They get some economies of scale, both on the cost of screening and evaluation for their investment process, and a better bargaining position for fees," he says.

"However, a potential drawback is that when the individual members do not have identical investment plans, they are looking at different things, and if you're not looking at the same things, it's not beneficial to have five different points of view around the table. It makes the investment process complicated. But they have managed."

Laxton agrees that Club members' requirements do not always coincide, but says: "Any investor in a fund of funds may be exposed to some funds which are not necessarily what they need. In fact, within the Club, each member invests on a stand-alone basis."

He says: "The only downside could be that the five investors are open with each other as to where they are investing and how much money they are putting in. So there has to be an element of trust. In contrast, in a country such as the UK, there would probably be less openness. However, at meetings we tend to talk more about overall strategy than about each member individually."

Laxton says the idea behind the Danish Real Estate Club is a good one for institutional investors, as it makes the market more open. "Transparency is a good thing," he says. "But if a group of investors are not prepared to be so open, it could be an absolute bar."

He also says that the Club is a way of tackling a problem common to most Danish pension funds: lack of diversification in terms of property investing.

"They have sector diversification within Denmark, but own little property outside the country," he says. "Increasingly, Danish investors are realising that they have been under-diversified and are now seeking to rebalance their portfolios."

Laxton says that an investment club is more of a concept for relatively new investors to the indirect property market.

"I believe those investors have more to learn than to lose by forming these associations, but perhaps in those countries where they are less experienced," he says. "I suspect we are unlikely to see clubs being set up in, say, the Netherlands."

That point of view is echoed by a director of one large Danish pension fund which is not a member of the Real Estate Club.

"The Club is a very good initiative for small and medium sized investors," he says. "If you do not have the critical mass to be able to finance a large due diligence process, it is a good idea to team up together."

But he adds: "We are not a member because we have the critical mass. At the beginning, they invited the large pension funds, and so we said we are a long way ahead in our programme, and while we could contribute, we were not sure if we could get any value from it."

Søren Schjødt-Hansen, chief investment officer, FSP, says his pension fund has certainly had value from the Club.

"As a club, we have three groups of advisers - investment, tax and legal - and we have to negotiate the terms with our advisers, on behalf of the Club, as to what we should pay for general advice," he says. "Those fees are lower than they would be if we were investing alone. Similarly, when Club members do invest in the same fund, the advisers' fees are split between them and are lower than if they had gone in alone."

He says however that fund management fees depend on the fund structure, so there is not necessarily a bulk discount to be gained.

"If the fund is a new entity, the investor might be able to influence the cost structure," he says. "But if you invest in an existing vehicle where the rules are already set out, it might be difficult to save costs, unless they are agreed to be negotiable. That of course depends who the supplier is and whether the fund is closed-ended or open-ended."

He says that Cushman & Wakefield's work investigating funds means that the Club members can concentrate on what is more relevant to them.

However, he adds that one drawback is that time can be spent discussing different investment possibilities which are relevant for some members but not others.

But he says: "FSP has been investing in a spread of broadly-based funds, whereas other members have gone into more specialist funds. I am not sure if it does take up more time than if we were to do all the investigation on our own. But any extra time taken is more than compensated for by better investments and, sometimes, lower costs."

Schjødt-Hansen says that different members have different experiences and that these complement each other.

"In the first year, we at FSP diversified a little bit more than we initially expected," he says. "We are now going to be looking at more specialist areas in 2007."

He does say that the investment timetable can be difficult because committee members have other responsibilities:

"On the other hand, it is these specialist responsibilities that often bring added knowledge to the table, making the Club more effective."

Schoedt-Hansen says: "We think the Club is an alternative to a fund of funds structure. It is broad in the sense of property sectors, and also geographically. As a whole, we would say it has certainly lived up to expectations."

PFA joined the Club for three main reasons: to reduce cost, exchange information about different investments in Denmark and improve performance.

Michael Willumsen, managing director, PFA Invest International, says: "Since 1991, PFA has been investing in properties outside Denmark and in 1998 PFA formed a partnership with Grosvenor Estate Holding in relation to the Grosvenor London Office Fund."

Willumsen is the Danish Real Estate Club's current chairman, chosen on an annual rotational basis.

He says that the Club's strength is its ability to hire advisers such as Cushman & Wakefield to filter the many different offers from property fund providers.

"We're quite happy with the results," he says. "And the more experienced we ourselves become, the easier it is to do the due diligence and cut risks."

He said that the Club has been able to cut costs by shopping around for other advisers and splitting fees by seeking advice as a single customer. PFA has cut its legal costs relating to indirect property investing by at least 25%.

Willumsen says, "The benefit for members is that when we have committee meetings, we discuss how we're doing. In particular, we can talk about the different aspects of investing abroad."

It might be supposed that playing a full role in the Club's activities would be fairly time-consuming. However, Willumsen explains that indirect investment is only a tiny part of his job as the managing director for PFA's property investing operation. "In fact, being a member of the Club means I spend less management time dealing with our foreign indirect investments," he says.

Willumsen adds: "It is difficult to say if the Club has improved our performance, based on the three years of membership, but we are very happy with the investments we have made so far. However we do now have quite a different investment strategy overall. We're still making direct investments in ‘prime' office buildings. In relation to the activity through the Club, PFA is concentrating on shopping centres, logistics and warehousing, and the knowledge we have gained through the Club has fed into those."

Meanwhile, on a more general level, Strihagen says the investment Club is part of a wider trend across Europe.

"It is seen as a novelty and quite a success for institutional investing," he says.

"We are seeing more and more cross-border investments, with institutions getting to know each other much better. Whether it is a club such as the Danish Real Estate Club, or a less formal grouping, investors are starting to talk to each other and share experiences. At a general level, I think it will become more common to share this kind of information, especially on an informal or project basis."