With around SEK 350bn (E36bn) assets under management, Swedish mutual insurance company Alecta, is the largest manager of pensions asset in the Nordic region. Formerly SPP, Alecta’s main core business is the occupational pension ITP, based on an agreement between the confederation of Swedish enterprise and the federation of salaried employees in the industry and services (PTK). At present the company employs around 700 employees, providing services to around 27,000 companies by administering 1.4m insurance contracts.
Currently, Alecta’s total real estate portfolio represents around E3.9bn , invested in retail and commercial real estate both in the Swedish local market and internationally, mainly in the UK, the Netherlands and Germany and also has some exposure to the US market.
Alecta firmly believes in the benefits that investments in real estate can bring to institutional portfolios, and unlike other institutional investors they invest 95% of the total property portfolio directly.
“At the present, we are investing around 10% of our total portfolio in real estate,” says Neil Turner, portfolio manager Europe, at Alecta in London. “We operate in range between 7.5-10% exposure to real estate, so we are now at the top end of that range.”
From London, they look after the international exposure of their real estate assets. “Our team is in charge of the portfolio management, this is deciding in which countries we want to invest, and the asset management is done by Aberdeen Selecta,” Turner says. “Apart from the UK, the Netherlands, Germany and the US, we are also looking at new countries like France and Spain.
“We like investing directly in real estate and we don’t follow the approach of many for instance Dutch institutions that mainly invest in unlisted property funds or listed property securities,” he says. “That’s not the way we want things to be.”
Turner comments that investors in international real estate have long been critised for not being able to approach the local markets properly, this affecting returns. “People always say that because you don’t have the local knowledge you therefore end up buying the wrong property and underperform,” Turner says. “But our own experience proves that this is not true. During the last six years we have outperformed the local benchmarks in each country where we invest.”
Their approach is to use the knowledge of local managers or organisations to decide which investment are appropriate. “We rather work with local managers, pay them a fee and benefit from their local knowledge, but own the building directly ourselves,” Turner comments. “This way we don’t have to get anyone else’s permission if we want to sell a property, avoiding liquidity problems and difficult issues to do with evaluation of the shares and so on.
“So, invested indirectly in property is of course an option but we are being very cautious about it.” Turner explains: “We think that if we want to invest in country where we don’t have local knowledge, for instance Spain, it’s better to work with local managers and invest directly in the country, than to invest indirectly through some fund manager who is trying to raise money to invest in that country.”
Turner also talks about the general benefits of having some exposure to real estate in institutional portfolios: “I see two main reasons why real estate investment can benefit institutional investors. The first one is related to the fact that real estate performs differently form equity and fixed income. The last two years are clear example of this, when we have seeing the equities markets going down while real estate continued to deliver positive returns.
“Another reason is that I personally believe that real estate is quite competitively priced compared to other asset classes,” Turner adds. “Property returns of 7% or 8% are very high compared to the dividend yield you get from an equity portfolio.”
Thinking about the future and the possibility of increasing property exposure in Alecta’s portfolio, Turner says: “I would personally would like it to be a bit higher, around 15%, but for the time being we’ll stay around the current 10% of total assets.”
Alecta’s approach proves the potential for investment internationally in real estate.” As far as we are concerned, being a foreign investor in foreign market hasn’t meant underperformance,” he says.