Pension funds and insurers have stopped increasing their exposure to Dutch residential mortgages. New investments fell to €2bn in the first nine months of 2024 – compared to the more than €13bn invested in 2021.
From 2014 onwards, the amount of mortgage investments on the balance sheets of pension funds and investments in mortgage funds on behalf of pension funds had been increasing at a steady pace. For both pension funds and insurers, an increase in mortgage investments of about €6bn per year was not unusual.
However, since the beginning of 2022 interest in new mortgage investments has fallen drastically. Mortgage investor Aegon Asset Management and DMFCO, the asset manager behind Munt Hypotheken, see two different reasons for the decreased enthusiasm.
The main explanation for the decline in new investments is that most funds have now reached their target allocation for mortgages.
“As a result, it is not surprising to see the growth in allocations stalling. We see that investors are still increasing to maintain their exposure as their assets under management increase, but very large transactions have become less common,” said Rogier van der Hijden, managing director at DMFCO.
The decision of civil service scheme ABP earlier this month to buy a €2.7bn mortgage portfolio from another investor is an exception to this trend.
ABP invests relatively little in mortgages, and therefore still has a lot of room to expand those investments. The ABP transaction is not included in DNB’s figures, because it only took place in the fourth quarter of this year.
Most pension funds started investing in mortgages about 10 years ago. Some, such as the pension fund of telecoms provider KPN, even invest more than 20% in the asset class and plan to reduce that allocation slightly.
Precisely because many funds were busy increasing their mortgage investments in the years before 2022, the allocations were temporarily at a higher level, according to Rutger Brascamp, head of mortgages at Aegon Asset Management.
“The period of 2013 to 2022 was actually quite extreme in that sense. I don’t even think the decline we see now is that big, because growth has continued at a lower, but fairly stable level. I feel comfortable with that,” he said.
Higher interest rates
Nevertheless, the timing of the decline in new investments remains conspicuous, coinciding with the start of a period of rising interest rates at the beginning of 2022. Brascamp also sees that connection.
“In the period before 2022, we even saw negative swap rates. The investment theme then was the search for yield and the illiquidity premium. But now that interest rates on liquid loans have clearly risen above zero again, they have become an interesting alternative to mortgages again,” he said.
“People may also just have been a bit shocked. Due to the relatively long duration on mortgage loans, often of up to 20 or 30 years, market values fell extra due to interest rate rises, by up to 10%. That prompted certain investors to adopt more of a wait-and-see approach,” he explained.
Van der Hijden of DMFCO isn’t worried either. He said: “We are seeing a slowdown in growth, but we still see growth. The arrival of the new pension system also means that some funds are postponing their investment decisions for a while. That also plays a role in explaining the decreased interest.”
Moreover, despite the changed interest rate environment, mortgages are still attractive, Van der Hijden pointed out: “Mortgage rates are still 150 basis points above the swap rate. So the illiquidity premium is still there.”
This article was first published on Pensioen Pro, IPE’s Dutch sister publication.
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