Building for the long term

As the Netherlands’ economy roars ahead of others on the continent, parts of the country look like a gigantic building site. One pension fund that won’t object to that – for obvious reasons – is the industry-wide scheme for the building sector.
Stichting Bedrijfspensioenfonds voor de Bouwnijverheid (BPF-Bouw) has around 200,000 active members in the sector. The Dfl29bn (e13.2bn) fund has nearly a quarter of its assets in real estate, practically all of it within the country, practically all directly owned. The fund is managed by SFB investment management in Amsterdam’s Sloterdijk. It is part of the SFB group, which offers a range of services, including insurance and other financial services to employers and employees, mainly in the building industry. It also runs the investments of the pension scheme for SFB’s 2,500 employees.
SFB investment director Martin Huibrechtse says: “Not only is the fund an investor in real estate, it is also a real estate developer. We believe on the development side, it is one of the largest in the Netherlands.”
The property investment portfolio is heavily tilted to residential property, where the fund owns and manages around 22,000 houses and apartments, all of which were developed by the fund’s housing investment department. Altogether these represent nearly 75% of the real estate investment, with 13% in offices, 6% in retail, 2% in warehousing, 3% in land and the balance in indirect investments, mainly abroad. “More than 90% is in directly-held Dutch real estate.”
So the majority of the fund’s Dfl400m–Dfl600m new spend each year in real estate investment goes into housing. Because of the social aspects of residential property investment, the fund works closely with municipalities and other local authorities. “Particularly for housing investment, we have to accept social responsibilties. A building is not like a share certificate that you can put in a drawer, it is part of the environment.” But this is something that works both ways, he points out, as the municipalities do not like speculative builders and prefer longer-term investors such as SFB. “They see us as long-term partners, and not as people just moving in and out.” One particular redevelopment was the old Olympic stadium area in Amsterdam, which was “a social activity, but at the same time, it was undertaken on a commercial basis, because of our responsibilities to the fund and its members”.
Most of the residential properties built are let, though from time to time some are sold. “Now and then, we have to optimise our results and sell, that would very much depend on the property involved. Family properties would be sold to the family.”
The returns obtained on the property portfolio as measured by the WM Company have been good, averaging 11.5% over a 10-year term and 11.3% over five years, which compares very favourably with other funds in the WM universe, with returns of 7.9% over 10 and 9.2% over five years. Last year’s real estate returns were a sparkling 14%, says Huibrechtse.
He attributes much of this outperformance to the fact that the fund undertakes its own developments. “It is because we have these opportunities at an early stage.”
Huibrechtse also points to the asset liability implications. “There is a strong relation between property development and inflation, and in the absence of index linked bonds, it is very important to have a class of assets like that, even if the returns are a bit lower than elsewhere.
“A further aspect, is that in developing new houses, we create jobs and create opportunities for business in the Netherlands. So long as it is a good performing class, why shouldn’t we do that, remembering that our prime responsibility is to our pensioners.”
One major difference between the property side and the rest of the fund’s assets is that around 80 people are employed in the real estate department, compared with 20 to run the rest of the portfolio, practically the complete opposite to the split of the portfolio. “This is mainly because of the heavy development activities, but we do much of the property management, such as collecting rents ourselves.”
Although, over 10 years, real estate has produced better returns for the fund than equities, in the past five years the position has been reversed. The fund’s neutral position as a result of its asset liability study is 45% fixed income, 30% equities and 25% real estate, though currently real estate is around 23% and equities are nearly 35%.
Of the equity portfolio, nearly 23% is still domestically invested, while around a third is in the rest of Europe. “We are biased to the home market, but that will change over time,” says Huibrechtse. The US accounts for over 30% of the equity portfolio, with 6.3% in Pacific basin, 5.7% or so in Japan, and a small proportion in Latin America. The range of external managers includes Barclays Global Investors for Europe outside the Netherlands on an indexed basis, with State Street, Martin Currie and Schroders on an active basis for the same mandate. The US portfolios are run by BGI on an indexed basis, by Sirach in Seattle and Tukman in San Francisco on an active basis, and by Jacobs & Levy on a quant basis from Roseland. The Pacific Basin is managed by Jardine Fleming, Morgan Grenfell and Friends, Ivory & Sime, all active, while Scudder looks after the active Latin America equity portfolio. BGI runs a Japan indexed portfolio.
Huibrechtse is confident about the future outlook for the property market in the Netherlands. “Our expectations are rather high and we see no need to change direction.” As to adding to the 10% foreign real estate component, he says: “The Dutch market has its limits and there could be more emphasis on foreign investment.” But he does not see this being done other than indirectly. “Long term, there may be opportunities to do direct developments in other countries in Euroland. But this would be in co-operation with other international investors, as we do not have any international know-how. However, it is not our highest priority.”

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