Changing ideas on real estate
During the past 10 years institutional investment companies (pension funds and insurance companies) have multiplied their investments into indirect real estate (shares in real estate funds) tenfold. This development represents a change in thinking on the issue of investing into real estate.
But if it is true that in Europe everything happens about 10 years later than on the other side of the Atlantic, investors into real estate can look forward to considerably more change.
Trendwatchers predict that shortly we will see the same ‘financial supermarkets’ in Europe as already exists in the US. Increasingly, institutional investors will have to specialise their real estate investments, for example, investing exclusively into shopping malls or only into office blocks on locations near central railway stations. It opens up the opportunity to allocate wealth according to one’s own judgement, based on an asset mix built from investments which are freely transferrable. In view of the European unification this undoubtedly will lead to an even further specialisation among the investment companies. Real estate funds will offer differentiated investment products on the shelf, just like in a supermarket.
The increase in scale required to implement such a strategy, is well under way in the Netherlands. Recent mergers (Amvest/Rodamco and Uni-invest/VastNed) confirm this. This trend of mergers and acquisitions also hastens a further professionalism in the real estate world itself: increased transparency, adequate information exchange, a clear cost sturcture, higher demands in the area of accounting and controlling, a consistent asset valuation system and participation in benchmarks and indices.
At this moment the average real estate portfolio of Dutch pension funds is about 8%. This amounts to about €35bn. This percentage will likely only increase in the future. But in which direction? Will it be direct or indirect? Today indirect investments represent already 30% of most of the real estate investment portfolios of pension funds.
Pension funds in the Netherlands indicate that a minimum real estate portfolio should at least be about Nlg1bn (E450m). Mergers and acquisitions are being considered to achieve this economy of scale. Research shows that today almost 20% of all investors considers a merger or an acquisition. To the Dutch real estate investor 1999 proved to be an excellent year. Real estate funds achieved an average yield of more than 16% and the institutional investment companies, including pension funds, topped that by a full one percent. Investments into real estate increased dramatically. Total investments of institutional investment companies increased by €3.8bn. It is believed that during the coming years they will spent another €5.8bn into new real estate. Indirect investments seem to be preferred. As at December 31 1999, Dutch institutional investors held shares in real estate funds valued at about €13.5bn. In 1993 this was a mere €5.0bn. The yield on indirect real estate investments amounted to 12.2% in 1999. By contrast over 1998 the yield was negative, that is –4.6%.
Remarkable is the German interest into Dutch real estate. During 1999 purchases showed a staggering 27% increase over the previous year. Over the next few years the Germans will again invest billions of DM into Dutch real estate objects. German investors consider Dutch real estate investments as a long term investment. They indicate that they will hold on to their investments for between 10 and 20 years. Until 2002 German investors indicate that they will invest almost an extra €6bn into Dutch real estate. Office blocks are by far the favourite, followed at a distance by shops, and only at a limited scale by industrial estates. Major interest is directed towards the Randstad, the area bordered by the major cities of Amsterdam, The Hague, Rotterdam and Utrecht.
Major investors in the Netherlands are fascinated by the stock exchange. For some time now, institutional investors such as ABP and PGGM have been distancing themselves from their investments into real estate, that is investing into funds in which they are shareholders themselves. Now is the moment for the next move. ABP are preparing themselves to introduce their newly created real estate fund WBN/VIB (retail investments), KFN (office block funds) and Vesteda (housing funds) to the stock exchange. The story behind this is clear and simple. The investors do not want to become real estate entrepreneurs themselves. Moving minority stakes is what they want. In the early days investment portfolios were filled with investments into companies (shares), federal government (bonds) and bricks (real estate). In the meantime, real estate is not considered to be just a heap of bricks anymore. In the view of pension funds investing into real estate this requires the development of an investor’s mentality as well. This means that institutional investors more and more delegate the entrepeneurship associated with real estate to highly specialised companies in this area, such as Rodamco Continental Europe or WBN/VIB.
A second solid argument for institutional investors to distance themselves from real estate investments is the transferrability. Pension funds must be much more flexible in their investment strategy due to their ever changing obligations. Direct real estate does not fit this requirement. Buildings are much more difficult to dispose of than shares, as such explaining the increase in indirect real estate investments. Yet, we have seen that vast real estate investment portfolios are just as difficult to get rid of as buildings. But also the opposite has happened. PGGM underwrote its American portfolio with real estate fund Cornerstone. Critics considered this just a administrative transaction. In the meantime Cornerstone has proven that it could enhance the transferrability and today PGGM is just a minority stake holder.
The real winners on the Dutch real estate market are the so-called closed real estate funds. It is easier for them to get money than to get real estate. An example of this was shown by the closed funds of ING Real Estate last year. Recently Jones Lang LaSalle placed the Eurofund V in five countries for a total of $350m. In the Netherlands, Fortis introduced a closed fund aimed only at the Dutch market last year. The total real estate value amounted to $150m.
The yearly research into real estate investments of major institutional investors showed a dramatic increase in the value of investments in to real estate by almost €10bn. A major part of that is the increase in the value of the indirect investments. A remarkable increase of the real estate portfolio could be noticed with ABP (€4.0bn), PGGM pension fund (€1.7bn) and the ING Group (€1.0bn). Aegon, Bouwnijverheid Pension Fund and Metaal en Technische Bedrijfstakken Pension Fund also showed growth figures of above €1.0bn.
Funds holding major foreign interests were PGGM (74% by the end of 1999, including shares in real estate funds), Shell Pension Fund (57%), Stork Pension Fund(45%) and Metaal en Technische Bedrijfstakken Pension Fund (40.9%).Grafische Bedrijven Pension Fund andHoogovens Pension Fund also held major foreign interest stakes. Funds which by tradition held major foreign interests, such as Pension Fund Metaalindustrie and KLM Pension Funds, reduced their foreign interests dramatically. About one third of all pension funds do not hold any foreign investments anymore.
The move by real estate institutional investors from direct to indirect will probably continue. It moved from a mere 5% in 1980 to 24% in 1995 and finally to 42% in 1999, so what will the future bring? Investments into foreign real estate funds will also increase. Today pension funds already have invested 62% of their indirect real estate in foreign real estate funds. Only two years ago this was just 51%. Under the influence of international cooperation and benchmarking, such as the ROZ/IPD index, pension funds real estate investment-mix will increasingly become an asset management tool and will therefore see an ever increasing professionalism.
Elzard Engelkens is director of Kamerbeek Bedrijfshuisvesting in the Netherlands
Sources: University of Amsterdam, Vastgoedmarkt and Kamerbeek Vastgoed Magazine