The Vienna-based pension fund BVP-Pensionskassen (BVP) feels it was right for IPE’s real estate investments theme award because it believes its property investments strategy is well tailored to the needs of an Austrian pension fund and because the strategy is clearly structured, defined, well diversified and fits in best with a multi-asset class investment portfolio.
It was back in summer 2002 that BVP decided to examine the benefits of investing in real estate as an asset class. This was part of a drive to diversify the fund’s overall portfolio. Following several meetings with industry experts and asset managers, BVP concluded the best way to incorporate a real estate portfolio would consist of core investments across Europe. At the same time it realised that listed property stocks have high correlation in relation to equities. The solution was the creation of special fund under German, not Austrian, law, since there was no applicable legal framework in Austria at that time that would allow BVP the opportunity to make direct property investments. BVP determined the new fund should have low correlation with its existing main asset classes – equities and fixed income.
Given the minimum size of this kind of fund is €300m, BVP realised it was impossible to create the fund alone. Hence, it began talks with one of its competitors in the Austrian pensions market, VPK Pensionskassen (VPK), which was enthusiastic about joining forces, BVP says.
Together the two pension funds embarked on an international manager search. This initially took the form of long list of candidates that were invited to take part in the first round. A second round saw the short-listed candidates extend their applications, from which four managers were eventually invited to a beauty parade: Sal Oppenheim, AXA, Henderson Global Investors and HVB.
Henderson Global Investors was the eventual winner and was awarded the new real estate mandate. The portfolio guidelines call for a 7% annual return rate from approximately 25 properties. These should be split at least 55% office and 35% retail with a minimum of 75% of the investments in the Euro-zone. Overall leverage should be 50%.
The set-up procedure for the contracts lasted three months, with the fund finally ready to begin investing in February 2003. However this coincided with the start of the Iraq war and BVP says Hendersons was unable to buy any properties at reasonable prices, since the war had created uncertainty in the financial and real estate markets. So Hendersons began instead to look for other investors to bring on board. This was necessary because the minimum initial value of the fund was €300m but both BVP and VPK had committed only €75m each.
The first property was acquired in London in July 2003. The second, in Paris, soon followed in September the same year. By July 2004, the fund had 12 properties with the following geographic asset allocation: France, 16.47%; Germany, 16.61%; Netherlands, 16.23%; Spain, 10.23%; UK, 40.45%. Of these 12 properties, 62.3% is in offices, while 37.7% is in retail. BVP says when the fund is fully invested, it expects its value to reach some €800m. For the year to date in 2004, it has already returned 9.33%.
Highlights and achievements
BVP’s innovative move to set up its new real estate portfolio under German law successfully allowed it to get round the problem of not being able to invest directly in property under Austrian law.
Moreover, joining forces with its competitor fund VPK was a sound solution to the problem of making the real estate portfolio big enough to generate adequate returns and attract the best internationally renowned property managers. The expertise their chosen asset manager, Hendersons, brings on board means BVP and VPK can be confident their new real estate portfolio will achieve its fundamental objective of maintaining low correlation with its existing asset classes, notably equities and fixed income.
The funds are confident the new portfolio will reach e800m when it is fully invested, despite teething problems caused by the Iraq war and subsequent lack of reasonably priced properties. Nonetheless, Hendersons used the time wisely to bring in extra investors and returns of 9.33% for the year to date prove that the strategy was well planned and implemented.
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