The Munich-based Bayerische Versorgungskammer (BVK) has the distinction of being Germany’s largest pension fund. As a multi-employer scheme, it provides benefits to a range of 12 different occupational groups, ranging from civil servants, the medical doctors in Bavaria, vets, to actors and musicians, as well as chimney sweeps.
Each group has its separate arrangement with its own asset allocation, and the extent of the schemes vary greatly with the size of the professional group covered and its length of establishment. But all in all, invested assets come to over e33bn.
At the heart of the investment approach is a central core of assets invested in traditional German absolute return process accounting for a large tranche of the portfolio – around 80%. The most important of the assets here are the Schuldscheindarlehen, basically 10-year loans made on a buy and hold basis, with a guaranteed rate of interest and return capital at the end of the period, and the domestic real estate portfolio, which accounts for 5% of assets (book value).
In order for the BVK to meet its obligations, around 80% of total assets is used to produce the absolute return of 4% required each year.
The other 20%, which is designated as a ‘surplus’ portfolio, is run on very modern lines using the latest master KAG Spezialfonds structures, again with international real estate featuring as part of this portfolio. The surplus portfolio is made up of 10.7% equities, 3% fixed income, 3.3% alternatives, comprising high yield, emerging markets and hedge funds, with 2% committed to international real estate funds.
This almost core-satellite type structure has served BVK well, with an overall return of 6.7% in 2004.
Klaus Harenkamp, who has been with the fund for 11 years, runs the whole portfolio amounting to e2.3bn, with specialists from other departments and a small team. He himself is a civil engineer and architect, having studied and trained in Munich and spent some time in London.
Real estate has a long tradition in the fund, he says. “We have invested directly in residential property across Bavaria for a long time.”
The first major change came some 10 years ago, when in 1994 the first move was made into investing in offices. “This was driven by the return differential of 5% from housing and 6% from offices at the time.” By 1996, these office investments were spread across seven locations in Germany.
Until recently, the holdings have been directly held. “For this part of the portfolio, we would describe our approach as core. But where we use Spezialfonds from outside groups, this would be core-plus, with an expected return target of 6.5%.”
The fund made another step change in its real estate management process by taking the decision to have an active stance regarding the portfolio, says Harenkamp. Since then the fund has been involved in a programme of acquisitions and disposals. “The main thing we are selling is residential,” he says.
“In the big portfolio we manage ourselves, we have the economies of scale so there is no problem in competing with other managers.”
The active management of the large residential portfolio is quite an undertaking. “There are 36 locations where we have mostly residential properties. It is important to reduce these as it makes no sense to have such a wide range of holdings just from a cost reduction point of view.” The fact that the portfolio is spread so widely is partly historical.
He points out that there was a time in the past when yields of 8-9% were available. The returns that were needed to be achieved on the portfolio of 4% annually did not pose the problem or the constraints then that it can do nowadays.
In such a benign returns climate, it was possible to take into account social considerations, such a professionally related funds wanting to provide buildings for students as accommodation. In current conditions such approaches are not so possible. “Times have changed. The focus has to be on obtaining the best performance.”
BVK does have a tax consideration, such as when it sells real estate that it has not held it for a minimum of 10 years. “But it is not a real problem for us to actively manage within this restriction,” he says.
“We sold eight buildings for a total of e53m in 2004 and we are looking to do this again this year, when we hope to have a further five on the market.” These are to be done as a single asset deal. “We have a special process set down for this to fit in with our rules for disposal on the market.”
The fund works with consultants on such transactions. But there are many projects where there are no consultants involved. “For us, it is important to include a consultant when you have a very well defined target and you want to find the right manager for a specific market, where we do not know the full market.”
He adds that the fund is always prepared to include consultants, where it is clear that value can be added from their contribution.
For the latest single asset deal the intention is that this should be done by the fund itself. “We have a very well defined strategy when putting properties onto the market, with the necessary advertising and marketing exposure, and using the best estate agents.”
For this deal the whole approach to the disposal process was analysed with the help of a consultant. “We looked at the possibility of doing a joint venture with a specialist residential firm or looked at putting the whole portfolio into a Spezialfond. In the end we came to the decision, mainly for reasons of costs, to handle the asset deal ourselves. Also, it means we can control the whole process.” He adds: “When you do joint ventures, then you have to share profits!”
From 1999, BVK has been involved in 25 projects directly investing e1bn, making an average of e40m per investment. And, of course, this is done without any leverage, since the fund is not allowed to use this for domestic investments.
The move internationally was done using Spezialfonds. Harenkamp points out that this move meant using outside groups, which were selected after a series of stringent beauty parades. “This we see as core-plus, providing an expected target return of 6.5%.
“In 2000, we made our first move outside Germany, through such a fund, investing in Euro-zone properties, which is run by Invesco.” Thanks to the successful disposal of one of the properties, the fund returned 8.8% last year.
The second fund, run by Generali Landlease (GLL), provides real estate exposure in the US, as well as in Europe. Currently, this has just one holding, an investment in a retail logistics building near Boston, US. BVK has only had this vehicle in place for a short time. “The GLL and Invesco fund meets the needs of eight of our pension schemes.”
He continues: “More recently, the fund has signed up to a third investment fund, covering the US 50%, Europe 30% and Asia 20%, which is run by TMW Pramerica.” So far, this has not made any investments.
While the internationalisation is a step by step process from Germany to the rest of Europe and then to US and Asia, it is nonetheless a dramatic step in BVK’s eyes. With leverage of up to 50% possible with this departure, the end game is to have an international portfolio of E1.5bn in place over time.
Though none of this exposure will be managed internally, Harenkamp is already actively involved in the monitoring of the developments, which requires travelling to the different locations.

As the fund has become involved in a number of prestigious office developments, such as Lenne 5 in Berlin and Heimeran in Munich, it has inevitably been caught up in the fortunes of the rental market.
In the current competitive market, BVK has been successful. “In 2004 we let 4,300m2 in Berlin, in Dusseldorf 4,500m2 and in Hamburg 2,000m2,” says Harenkamp.
The piéce de résistance however was in Munich at the Heimeran office building: 5,800m2 was let in 2004 and earlier this year Siemens Health Insurance moved into the remaining 3,000m2.
“Currently, the German market is very difficult. Munich, for example, was a city where the unlet portion had always been very small. “Currently in Munich there is 1.8mm2 of vacant space.”
In these competitive markets it is essential to have the right premises, he maintains. “Here our philosophy is to invest only in first class office buildings, which enables us to be successful in these difficult market conditions. By letting 11,000m2 in 2004, we were the biggest single office renter in Munich last year.” The fund does not have much vacant space on its hands – less than 5%, which is really down to the good quality of the premises, he maintains.
In future the fund will be looking to invest in prelet properties, having recently bought a fully occupied office in the centre of Munich. Another change in running the portfolio has been the trend to outsource the facilities management. “So for new office buildings outside Munich, management is always outsourced,” says Harenkamp. However, the domestic residential however is handled in-house.
“This is not just in Munich, as we have operations in Mainz, Nurnberg and Wurzburg.” However, if residential properties are bought further afield such as in Hamburg, this will be outsourced to facilities managers.
But the whole mindset as how the business ran has had to change. Harenkamp points out: “In the past, management companies would come and offer us investment opportunities which we would analyse in-house.” Now portfolio needs are more specialist, and the fund could require, for example, residential properties in Frankfurt to meet the needs of a particular scheme. “So, for the lawyers fund we need an office building in Hamburg.” As a consequence, the fund is much more proactive and is out and about looking at how to meet its needs. “Of course we look at the opportunities that are presented to us, but we are now looking at the places we need to add the portfolio.”
And as the disposal of properties plays an even bigger part, it is a requirement to have the right IT platform. “We chose a new EDP platform from provider SAP last year,” he says. Another aspect where the platform is useful is that BVK includes some of its activities within in the DIX performance statistics – the main German real estate index. “Through this we report our portfolio to the DIX, and in return obtain the overall market reports to compare ourselves against.”
While there is still some distance to be covered before the transparency of the German market can be compared favourably with that in the UK, the fund reckons that this is still a very useful development that needs to be supported.