Spreading the net

Robert-Jan Tel TKP

TKP has invested internationally in real estate since it began operating in 1992. The overriding reason for going beyond Dutch borders in search of suitable property investments is diversification, says Robert-Jan Tel, head of real-estate investments at TKP in Groningen.

Although there is no shortage of property to invest in within the Netherlands, widening the field to include other countries makes sense because ofdiversification.

However, according to Tel, investing cross-border is more expensive in terms of fees and other costs, and this extra outlay is not always compensated by enhanced returns.

Since its inception, TKP has used equities to get exposure to the property market, rather than involving itself with direct ownership of bricks and mortar. And since 1998, it has been a multi-manager of purely non-listed real estate funds.

TKP Investments was originally the pension operations of the Dutch postal services (TPG) and the Dutch telecoms operator (KPN). Originally one company, when these two were split in 1998, the pension operations of both were spun off into a separate vehicle, and in 2003, that vehicle - TKP Pension - was sold to insurer Aegon.

These days, TPG and KPN remain the firm's biggest clients, and it undertakes all the administration and investment for both pension funds. But it now also has several other Dutch pension fund clients.

Demand from other pension funds in the country for cross-border real estate has been steadily increasing, says Tel. "The biggest pension funds already invest cross-border, but the smaller and medium-sized ones are now doing so too," he says.

The trend towards the internationalization of property assets is happening not only among Dutch pension funds, but also among those in other countries. Scandinavian pension funds have been making visible moves, he points out, selling domestically and buying abroad.

US pension funds too are coming into the property markets of both Europe and Asia.

There are no real legal hurdles for Dutch pension funds when they come to invest in foreign property, Tel says. "Most funds are limited partnerships and are structured to be accessible to several parties," he says. "Their structure also has to ensure that the Dutch funds - tax-exempt domestically - do not have to pay tax outside the country."

There is plenty of room for the cross-border market to develop, not least in terms of a secondary market, says Tel. "The money we are investing in private funds is growing and growing… what we lack is a secondary market for institutional investors trading in stakes in these funds," he says.

 

Laurent de Spirlet Integrale

As yet, Belgian pension fund Integrale has not committed itself to any property investments outside its national boundaries, but that could all change when the right proposition is found.

"We are quietly looking for possible opportunities in Europe, in countries close to Belgium," says real estate director Laurent de Spirlet. "All that depends on achievable yields, because the criteria abroad are quite different," he says.

He referred to quality of buildings, rental conditions and the length of contracts which have to be assessed before considering an investment abroad. Integrale is analysing the opportunity presented by a property in France, he says, but stresses the fund is not in a hurry.

"To start with, it would be easier to deal with investments in French or Flemish-speaking countries: for logistical reasons, Holland could be another source of opportunities. "Yields in Luxembourg are quite low, making it difficult for us to invest in that market," he says.

The fund already has some of the necessary expertise in-house for cross-border property investment, and the resources it does not have - including market information- it gets from agent documentation and other sources. Real-estate investments make up between 15% and 20% of Integrale's total assets of €1.1bn. Its €150m to €200m in real estate is invested directly and through leasing opportunities. The fund has not yet invested in REITs.

Despite political efforts to break down the barriers standing in the way of smooth pan-European investment, De Spirlet says there are still problems to overcome. "On a European level, so far, you don't find yet a real equality… hence the need for a local partner."

However, De Spirlet is interested in the way some small pension funds in the Nordic countries have put together their own pooled property investments. "I thought that was a good idea at the national level, and why not at the international level too?" he says. "We already invest in Belgium with other partners," he says.

"When the deal is too big, we try to find another fund to link up with." The pension funds have their own network to make contacts over investment deals, so do not have always to use third parties."

 

Andrew Chapman

John Lewis Partnership

In the UK, the John Lewis Partnership pension fund only began venturing into cross-border real estate this year and in common with other pension funds, it sees diversification as the main reason for doing so.

Investing in property internationally rather than entirely domestically increases diversification not only by broadening exposure within the asset class geographically, "but also in the underlying assets," says Andrew Chapman, pensions investment manager at the pension fund.

"Economic cycles in different property markets are often staggered, and this enhances diversification benefits."

But for the John Lewis pension fund international investments in real estate remain within Europe.

"We only invest in European property and it is all done indirectly in the form of investment funds," says Chapman. So far, he says, it is too early to tell how investments have fared in performance terms. The pension fund has £1.7bn in assets, 14% of which is in real estate.

It is slowly increasing its European exposure. "We are steadily picking up units in attractive funds," he says. There is enough availability of investments for the programme to run without problems.

The John Lewis pension fund uses DTZ for its real-estate investments, says Chapman. DTZ is one of the largest property advisers, with 200 offices in 40 countries.

"They were already our advisers in the UK, so the team at the pension fund knew them well before embarking on the move into Europe, he says.

Based on the fund's early experience in cross-border real estate, how would Chapman advise other pension funds considering similar moves? "Ensure you've got a wide spread," he says, "and also make sure the fees are not too high"