Pension funds in the Netherlands have increased their investments in mortgages four-fold to €44.8bn since 2014. Pension funds now account for 6.6% of total holdings of Dutch mortgage debt, up from 1.9% in 2014, according to figures from the country’s pensions regulator DNB.
2014 marks a turning point in the country’s housing market, as house prices started to rise again following the financial crisis.
Since then, the stock of mortgage debt in the Netherlands has grown by €93.5bn, 86% of which was absorbed by pension funds and other institutional investors. Banks, however, still continue to dominate the Dutch mortgage market, holding 79.9% of all mortgage debt.
Pension fund holdings of Dutch mortgage debt are now, with 6.6%, back at levels last seen in the 1990s. In 1985, pension funds even had a market share of 13.5% in the mortgage market.
At the time, however, pension funds tended to invest directly in mortgages. Now, more than 80% of mortgage investments are made via third-party funds.
The main appeal of mortgages for pension funds has been the relatively high interest rate compared to government bonds with similar duration, as well as the low default risk (at less than 1%).
PostNL: 20% in mortgages
Bakkers, the €4.9bn fund for bakeries, has invested 11% of its portfolio in mortgages. Margreet Verhoef, president of the investment advice commission at the fund, told IPE: “We consider mortgages a great addition to our matching portfolio. The risk profile is comparable to government bonds, but yields are higher.”
Bakkers may increase its allocation to the category further, but Verhoef indicated liquidity constraints are also a consideration. “In a way, mortgages have to compete with other illiquid, but higher-yielding assets for a place in the portfolio,” she said.
The €10.5bn PostNL fund invests even more in mortgages than in government bonds. The fund holds 20% of its assets in the asset class, possibly more than any other pension fund.
Share of institutional investors in the mortgage market back to levels last seen at the end of the previous century
President René van der Kieft of PostNL said the fund’s relatively old population calls for a low-risk approach.
“And we prefer mortgages to government bonds because of their superior risk/return profile. In the Netherlands, more than half of mortgage debt has an implicit government guarantee which makes it a very safe investment,” Van der Kieft noted.
The illiquid nature of the mortgage market is not an immediate source of concern or the fund. “We believe we can draw sufficient liquidity from other parts of our portfolio in times of markets stress,” he said.