The appetite of Dutch investors for real estate opportunities is growing thanks to excellent, stable long-term returns and changes in regulation. We estimate domestic demand could rise by €10bn over the next few years. On top of this, investors from the USA and Germany are now also taking an interest in Dutch real estate.
In spite of the challenges presented by nFTK, the new financial assessment framework for pension funds and life insurance companies, it also suggests many answers on investment policy. For example, the Dutch National Bank (DNB), the new regulator classifies real estate as less volatile and therefore less risky than equities. For pension funds which choose to use DNB’s assumptions, real estate will be measured as offering an annualised return of 6.5% for volatility of 15%, which compares favourably with the volatility of equities at 25%.
Real estate has returned 12.7% over the last five years for pension fund investors, as measured by The WM Universum, and over ten years has been the best performing asset class for Dutch funds. Given these salient facts, Achmea Vastgoed feels that the regulator is being rather cautious in its assumption.
Nevertheless, for the portion of assets responsible for producing absolute returns, real estate has a place of its own. We know this from our domestic client base of 60 pension funds and insurers. Clients may wish to raise their strategic allocation to real estate, which would increase our management from €4bn to €5bn by the end of next year.
It is perhaps regretful that DNB has decided not to assign real estate with a duration. Were this the case, the asset class could be used not only to generate absolute returns but also to help with better matching of liabilities. We believe real estate has in fact long duration due to the holding period and long-term nature of leases. Rental income also has a strong link with inflation, which is of service to those funds considering the indexation of benefits.
As things stand, however, we will use our book of mortgages, which have as an asset class been assigned a duration by the regulator, to help clients better match their liabilities. Achmea Vastgoed offers unique mortgage vehicles, one targeting the residential market and one targeting the corporate market.
We will use these vehicles to raise duration to comfortable levels for pension funds just as other providers use sovereign and corporate bonds.
The issue of categorisation has certainly not diminished but enhanced the appeal of real estate investments in all their manifestations. Let us argue from the relative to the general: Achmea Vastgoed is in the market to increase its property exposure by 25% within the next two years. If the entire Dutch institutional market is seeking a similar allocation, then all together we are hunting for opportunities with a value of around €10bn! The Netherlands is the European Union’s second most densely-populated member state. We would like to invest here in our own nation. But even in a built-up country, it is a challenge to find sufficient investment-grade opportunities in the Netherlands to satisfy such a great need.
There are two actions necessary for investors who want to make discerning choices to this class in such demanding conditions. The first is to embrace pooled rather than segregated accounts. This especially applies to smaller and medium-sized pension funds. If one looks at the consolidation taking place in the Netherlands, there are already fewer than ten major players in operation in direct real estate. Both ABP and PGGM, the two largest pension funds, concentrate on indirect, pooled funds. Among insurers, there are ING, Fortis, Achmea and Interpolis, although the latter two now find themselves part of Eureko.
These players are giants. If, on the other hand, you are a pension fund with just €100m in total assets, your purchasing power in property will be disadvantaged as a stand-alone customer. If the pension fund of €100m in size has an allocation to real estate of 12.5%, this means just €12.5m to spread across the different types of building and location available. Independently, it is an impossible ask.
In order to get genuine diversification; to obtain exposure to larger projects such as shopping parks, all but the largest investors need to join forces. This is why Achmea Vastgoed has formulated four pooled vehicles for Dutch direct real estate: one is in retail; one is in offices; one is in logistics and industrial buildings and the fourth is in residential. It is easy for pension funds to participate in these funds.
A final note on size: it is not enough merely to pool. Transaction costs and liquidity are probably higher for a small pooled vehicle than for a portfolio of direct holdings. Only when a pooled property fund reaches critical size is it able to truly offer the benefits of diversification to clients, with an internal variety of holdings.
The second necessary action is to look abroad. International real estate should be approached indirectly, through unlisted fund of property funds. For this reason Achmea Vastgoed has created two funds of funds: AREA Fund Europe and AREA Fund North America. In collaboration with London-based Property Market Analysis and Boston-based Property & Portfolio Research, Achmea Vastgoed has devised international property allocations which seek to extend the range of opportunities for stable, high-single-digit returns for Dutch investors.
Achmea Vastgoed through the AREA funds participates in a variety of privately-placed property funds. With a clear demand from clients, we expect the number of participations to increase considerably in the near future.
Property is a cyclical investment so by exposure to more than 20 domestic economies, including the new entrants to the European Union, we hope to smooth out the troughs which accompany single-country investing.
Achmea Vastgoed B.V., Gatwickstraat 1, 1043 GK Amsterdam, P.O. Box 59347, 1040 KH Amsterdam,
Phone: +31 (0) 20 606 56 10
Fax: +31 (0) 20 606 56 39