The Nordrheinishe Arzteversorgung scheme's solution to the conundrum of real estate diversification has won it the Award for the Best German or Austrian Pension Fund in the IPE Real Estate Awards 2006. The scheme's innovative pyramid structure for apportioning its real estate — both geographically and in terms of the way in which it invests — is a constantly evolving process.

The pension scheme had around €7.6bn assets under management as at end-March 2006. The NAEV works on the basis of periodically updated asset liability studies with a real estate component which varies between 12 and 16%, and is currently €1.1bn, or 13.8% of the portfolio.

All of the corporate divisions within the NAEV use SAP systems, and are linked both to each other and to affiliated partners via portal structures. This simplifies internal and external communication quite substantially and permits a very high degree of capital investment transparency in terms of planning, executing and controlling investment decisions.

The NAEV has, over the past years, reshaped its real estate portfolio in the form of a pyramid. There are several objectives in doing this.

Layering the investments in this way helps the NAEV to gradually increase the diversification of its real estate portfolio, using a disciplined approach to investing internationally, and choosing the most appropriate managers and investment vehicles.

The fund is also able to increase the international spread of the real estate portfolio in a transparent and controlled way.

And the pyramid structure offers the flexibility and impetus to enable the pension fund to respond quickly to changes in the international financial environment.

At present, the lower level of the pyramid is occupied by direct real estate investments in Germany — in Berlin, Dusseldorf/Cologne, Frankfurt, Hamburg and Munich. This constitutes the biggest share of the real estate portfolio, at around 63.5%.

The middle segment - just under 14% in value — contains indirect real estate investments in restricted funds, known as ‘Spezialfonds' mainly held via individual funds. These are spread throughout Europe, although they exclude Germany.

The upper segment of the pyramid, worth nearly 23% of the real estate portfolio, consists of indirect real estate investments such as real estate investment trusts (REITs), and property stock funds investing in REITs. These invest in Europe, the US and Asia.

The NAEV also holds small stakes in listed German property companies.

Its current real estate portfolio reveals a bold and ambitious atrategy of diversification.

In terms of sector, 70% of the investments relate to offices, with 20% in housing (flats) and 10% in retail.

But its geographical spread is much wider. Within Western Europe, it has investments in the UK, France, Spain and the Benelux countries, and has just bought its first investment in Italy - an office building in Milan. In Central Europe, it now has holdings in Warsaw and Prague.

Under consideration for next year are office and retail properties in St Petersburg.

Outside Europe, the fund has started investing in the US, and is looking at Mexico as well. It has holdings in real estate in the cities of New York, Washington, Los Angeles and San Diego, and is now extending its reach to second-string cities, and moving into sectors such as self-storage and homes for the elderly.

Most of its US investments are in funds run by Pramerica Real Estate Investors, while other investment partners include Fiduciary Trust International, Warburg-Henderson and Invesco.

Meanwhile in Asia, the NAEV is concentrating on Japan, where it has some office and retail holdings. It also has investments in retail and housing in Singapore, and in offices in Thailand and South Korea.

The performance of the indirect holdings is measured against local indices, although the NAEV says it is difficult to measure performance when the fund is not fully invested.

Over the next few years, the NAEV says that its direct investments in Germany will decline further, but that the regional diversification into the growth areas, particularly Asia, will continue. The fund says that in the long run, a balanced portfolio split one-third each between Europe, the US and Asia may be possible.

Furthermore, the pension fund could go one step further, by reversing the pyramid structure, so that indirect investments would form the base, with direct investment at the top. The NAEV says however that this cannot happen unless there are changes in the law.

Overall, however, the pension fund has shown that an inventive approach to structuring a portfolio can bear fruit, in terms of producing a controlled and transparent way of diversifying its property holdings on an international scale.