There can be very few European pension funds, if any, that have been invested in real estate for as long as PGGM, the giant e53 bn Dutch industry-wide fund for healthcare workers. From the early 1980s the fund had a strategy of direct real estate investment, both in Europe and in the US and mainly in offices, as Jan van der Vlist, director of structured investments at PGGM, explains: “We had this approach then because that was how the markets were developing. At the time there were not that many real estate investment companies around so you simply had to invest direct.”
To look after its US investments the fund had an organisation of 35 people in Atlanta; a 100% subsidiary of PGGM and by the mid-1990s owned a portfolio of around $1bn in just seven to eight office buildings.
“In Europe we had roughly the same approach and in Asia we had no investment at the time,” adds van der Vlist.
This in-house real estate strategy meant that in total PGGM had around 100 property investment staff worldwide managing a total portfolio of e3 bn.
By the beginning of the 1990s, the fund began to question whether it should continue with the direct strategy.
“We were growing as a pension fund and there was a trend developing of private real estate companies entering the stock markets, starting in the US. The main issue for us was whether our job was to allocate money around the world or to develop and manage buildings etc.
“A small committee at PGGM, including myself, looked at this and decided that it would be best to invest with local property companies rather than continue with direct.”
The switch of strategy from direct to indirect was made incrementally over a number of years at the beginning of the 1990s, starting with a small portfolio of indirect investments. At the same time PGGM began the process of restructuring and converting its direct portfolios into indirect holdings in private and public companies.
In the US, the fund sold its direct real estate portfolio to Cornerstone – a public office REIT – and made its Atlanta staff redundant.
After some consolidation in the US REIT market, Cornerstone bought Wilson properties (a West Coast developer), and Cornerstone in turn was bought by Equity Office Properties, now the largest office REIT with a $25bn portfolio and investments in 700 buildings.
When the fund first sold its direct portfolio to Cornerstone, it retained a 40% stake in the group. Following the consolidations, this stake was reduced to just 6% in EOP.
“That way we have been able to make money on both counts, both through the sale of our direct real estate and taking advantage of mergers and consolidations.”
Van der Vlist says that although the fund’s previous direct exposure had performed well due to the quality of the buildings owned, diversification was not optimal and risks were higher.
In terms of overall allocations to real estate, PGGM has also been something of an anomaly, with van der Vlist noting that past actuarial studies recommended the fund invest some 20% in property – somewhat high compared to standard pension fund exposure.
“At one time we had 18% in real estate, and now we are back at 11%.
“In our asset mix today, the neutral weighting for real estate is 13%, with a minimum of 10% and a maximum of 16%, although when the equity markets were falling badly we were temporarily a little above 16%. Within these limits though we aim to play the cycles and to optimise our results.”
Regarding the fund’s property exposure, Van der Vlist believes there remains a compelling reason to invest in the US, which is that the yields are higher than in Europe: “ This has to do with the perception of risk,” he says.
“The public REIT market in the US offers a broad and well diversified universe for an indirect investor.” Also for a Dutch pension fund REITS are tax efficient vehicles due to double tax treaties between the Netherlands and the US.
On the retail side the fund bought a stake in Corporate Property Investors (CPI) at the start of the 1990s. CPI, a US private company that owned a portfolio of high-quality regional malls, was bought by the Simon Group and PGGM continues to invest in retail with Simon in the US today.
The fund also had a spread of around $1bn in approximately 20 other REITS, some of which it sold last year. It also invested in a small number of private opportunistic funds, although 95% of its US allocation is in public vehicles.
“At the moment we are only selectively investing because many REITS look like they are overpriced with a big premium in a downward cycle, which is not the right time to invest.”
He explains that in Europe PGGM adopted much the same strategy of moving from direct to indirect, via selling real estate and merging companies. In the Netherlands PGGM shifted its direct holdings into a 50/50 partnership fund with Dutch insurer Aegon, called Amvest.
“This started as a real estate company with both a commercial and a residential focus. Then we split the commercial part out to Rodamco Europe and retained the residential part in Amvest.
“We moved some PGGM staff into Amvest and others are now with Rodamco. In Germany our portfolio is managed by Oppenheim Immobilien KAG.”
In addition, the fund has a number of other interests in European companies, both public and private and across the sectors: office, retail and residential. It also has a number of partnerships in the industrials sector, both in the UK and on the continent.
In Australia, PGGM takes a similar approach to its US investments, investing mostly in public real estate funds.
However, in the Far East, van der Vlist says a different methodology is necessary: “Those are sometimes jumpy markets – there is a lot of volatility and opportunity also. You have the Hong Kong players that are real estate companies with a large portion of development and because of that the stock price is volatile.
“You have to analyse the companies very thoroughly. We have a senior portfolio manager with over 10 years investment experience in the Far East. He knows every street in Hong Kong and every company and their management and he is able to play that cycle. You have to be very careful. We are playing the game there and most of the time making money, although not all the time!”
Expanding on PGGM’s overall philosophy regarding indirect investment, van der Vlist posits a series of logical steps: “The question is how do you make money for the pension fund and at the same time spread your risks? The answer is by allocating at the right moment into the different geographic areas and different sectors and by investing in the right companies. We have a bottom-up process and we are studying the markets very closely and we know a lot about the real estate markets we are investing in.
“By optimising that allocation and creating enormous diversification over countries, sectors and companies with a lot of buildings, we meet our investment criteria.”
In that selection process the first thing he says that PGGM looks at is the market and the timing of entry. Next is the quality of the proposed real estate: “Where is it based, is it urban, suburban, retail or office, for example?
“Also important is the balance sheet. We don’t want too much leverage. For strategic holdings we would have a maximum leverage of 50–55% and not more.”
Other important factors, he insists, are the quality of the management, as well as the strategy of the company, its legal structure and the tax implications.
“In short, you need to have good checklist for analysing both the commercial and financial side of real estate.”
For PGGM, such care is particularly necessary because the fund makes large strategic investments and, as the PGGM head warns: “It’s easy to go in but not to get out. Liquidity is a big issue in real estate.”

Long term, the fund has an allocation target between 35–55% for Europe, between 30–50% can be allocated to the US and 5–25% to Australia and the Far East. However with markets in a “down cycle” at present, overall allocation of 11.5% to real estate today is at the low end of the range, van der Vlist says. The fund was selling off exposure the past two years, both in the US and in Europe.
To this end the fund has some e6bn in its total property portfolios against e8bn two and a half year years ago.
He notes that for optimising its long term strategic allocations, PGGM uses a market indicator model that the fund has developed containing some 20 years of data on rents, operational expenses, cap rates and taxes.
“For a long time we gathered these market data from independent sources and we update them on a yearly basis. For us, as a long-term investor, the market indicator is a very useful tool for optimising our allocation and results.
In light of current market conditions, van der Vlist says it could take one or two years before there are attractive enough opportunities for PGGM to pursue.
“I think that at the moment prices are high, especially the US REIT stocks. Investors are currently attracted by the characteristics and dividends of REITs and a lot of institutions are looking to increase their allocations to real estate.”
Van der Vlist says he worries that this may cause a real estate “bubble”, considering the weak fundamentals. “I think these institutions are rather late! However, if other institutions are buying for us it’s a good selling opportunity.
“After starting 10 years ago with indirect investing in real estate and based on our experience over this long period of time, we think our strategy works very well for an institutional, long-term investor such as PGGM. Over the years, indirect markets have grown into maturity: there are many more investment vehicles available now, the market is more transparent and even liquidity has increased.
“Today PGGM holds a world wide indirect portfolio of e6bn, well diversified and in-house managed by a lean and mean team of just 10 professionals. Our investments are mainly focused on strategic investments, but also tactical and opportunistic styles are included. And, last but not least, our performance is good: we have been able to realise a stable performance over a longer period of time, reflecting the performance of the underlying real estate markets.
“I think we may be a trendsetter for a lot of institutions in that sense.”
For the time being though, van der Vlist is content to sit on the sidelines and wait for the right moment and the right opportunities to appear: “We are now back to a total allocation of 11.5% in real estate and I am very happy with that if you look at the cycles!”