At less than 4% ATP's allocation to real estate is low compared with other pension funds. Why such a small allocation?


he reason for investing in real estate is diversification; furthermore real estate should create a stable return over a period of time. The low allocation has historic reasons and is due to the fact that we are building up slowly, focusing on quality products. Additionally equities and bonds have had some fantastic years of growth and it is very difficult for real estate to follow that.

ATP is still a growing fund with more inflow than outflow. The significance of this is that when the inflow is higher than outflow we need to find new investments to maintain our share of the total portfolio. Furthermore the real estate asset class is not as liquid as bonds and equities.

By how much do you expect to increase your allocation to real estate and by when?

We have a 5% target for real estate allocation, but with such a big fund there is quite a way to go. Five percent is small but it is first step. When we reach 5% it is up to the ALM people of ATP to decide where we go next. Our ALM people decide the proportion of assets which go to alternatives.


How do you plan to achieve the increase?


TP has been an investor in real estate for more than two decades now. We have built up a very traditional direct portfolio of around 80 properties in Denmark focusing on office and retail. Four years ago ATP decided to increase exposure to real estate in general but we realised that we couldn't achieve this by investing only in Denmark. So we decided that we needed an international strategy based on investing indirectly.

There is no doubt that the headline reason was diversification: to get exposure to other economies so that we do not have all our eggs in only one basket.

But we are still running on two investment tracks: in Denmark we are building up a direct portfolio, and we have an in-house property management organisation dealing with that. In Denmark we focus on office and retail in our direct programme.



Why do you invest mainly in office and retail in your direct portfolio?


hese are the biggest asset segments within real estate and from a management point of view they are the easiest to handle. If we look at the office market can have long leases which give us a very stable and secure cash flow for a long period. We get direct return from the rental income...and then depending on the economy some capital gain too. The office sector is very much linked to the unemployment rate.

Retail very much depends on consumer confidence. We have also seen changes in retail structures from lot of shops in city centres to out of town units which need a lot of space and cheaper rent. Quite a number of shopping centres have come up here in the last few years. We took a decision some time ago that we do not want to invest in residential because our membership is the Danish population.


What is your strategy for investing abroad?

n markets outside Denmark where we invest indirectly we don't have the same restrictions so we have allocation to all real estate types, although again office and retail are the most dominant sectors. As far as newer sectors like leisure and education are concerned, we are not so advanced and so are not looking to invest in the near future. But warehouse/logistics is on our radar screen and we have done a number of allocations to this sector in our existing programme. The rationale here is increasing international trade, open borders in the EU, and the link to retail.

We outsource because we are very aware that a successful real estate investment is a local business so we team up with various fund managers all over Europe and buy into their local real estate knowledge.



Are there any further elements to your diversification policy?


ectors and countries go in cycles but with a very well diversified portfolio in terms of economy and sector we should be able to cover these cycles.

We really try to diversify our real estate investments from the very secure long-term lease office buildings to more opportunistic developments by combining elements. So when we do our indirect investments we both go for the more core type investments and also have the opportunity to invest in more opportunistic funds bringing two-digit returns but also taking a lot more risk but this risk. We share the risk with other investors in the same fund; we would not do a single opportunistic investment on our own which would be too much risk. So we are optimising our portfolio by investing in a variety of segments and countries, thus taking different types of risk.

Furthermore when we invest in the indirect market we also diversify among the fund managers. We are involved with a number of fund managers and they are all creating different results, so that is another type of diversification. We also see the timing aspect as a diversification meaning that if you buy your whole exposure one day you will take a risk on the valuation, so we buy over time meaning that sometimes we hit the cycle at the bottom and other times at the top.


Which new vehicles are you looking at?


ntil now ATP has been focusing on the direct properties and the unlisted market outside Denmark. We have not done that much in the listed segment but we are looking at all new real estate related products coming to the market including REITs and CMBS loans.

But we are playing conservatively and we would definitely not be a front-runner in any of these new classes.

Derivatives is another product coming up these days in the market: we are still watching them, learning the background and trying to understand this opportunity; I guess it could be another couple of years before we go to those.


Is the ATP real estate fund mainly Europe-based?


he UK and France are the biggest countries in the portfolio, having been some of the best performers in the past few years.

As for the US: we are just revising our investment strategy for the next three/four years and in that connection we have decided to start looking at the US market. But we may have made our first investment in the US within the next year. The reason for our decision to enter the US is access to a bigger more mature market, more products and diversification.

We have also been looking closely at the Asian market but have decided not to invest there. One of the more simple reasons is that is that we find it difficult to sit in Europe and be an active investor in Asia. Furthermore there are many differences between Asian markets: if you take Singapore and Japan and compare with China you find so many differences. So from a risk point of view we would prefer to go west than east. In the east there are just too many risks.


What is your view of listed versus unlisted?


he difference between listed and unlisted is tax, valuation and liquidity.

We have seen some structures in some countries where we can't structure our investments tax efficiently so we will be hit by double taxation. That is one of the advantages of the unlisted market: you are able to do your investment as tax efficiently as possible.

Regarding valuation: listed vehicles have a market which will give a more real valuation, if the market is efficient.

Liquidity is the third difference - liquidity is not a big issue for us when we allocate money to real estate because we invest for the long term.



Do you have concerns about transparency?


n the indirect market transparency is increasing. Compared with five years ago the market has improved a lot. INREV has taken a lot of good initiatives with indices, standard reporting and definitions, all of which will increase the transparency in the market.

But if the fund managers really want to sell their products to the institutions in future they really need to be more transparent. There is a way to go: for us it could a deal breaker with a fund manager if he is not transparent enough. We focus on that to help ourselves and the market in general.


ATP is a public scheme - what influence does this have on investment strategy?


think we have a more balanced and more conservative investment strategy than schemes in the private sector. But like a private sector scheme our main focus is to deliver best return.


What are the main challenges you face in your real estate investments?


ne of the challenges in the indirect market is to find the best investment opportunities in the market. We really try to dig into and understand the business model. In indirect market we have a principle which says we are buying management not property. Simply to find the best managers is really challenging.


What is your definition of the best fund manager?


lot of fund managers say we want to raise x100 million euro and deliver a return of y but at the end of the day it is a question of whether they will find the real estate in the market that will deliver all their promises.

Alignment, is a very crucial issue for us because it ensures that a fund manager always acts in the best interest of the investors because this also is in the best interest of the fund manager. This is ensured by getting right several factors in the overall alignment package - most importantly size, timing, getting the right people included in the alignment programme and symmetry (downside as well as upside).

The alignment packages offered by fund managers are getting more and more sophisticated - often with better alignment as a consequence - but also with an increasing risk of loosing sight of the basics in the complicated legal drafting.

Ultimately alignment is a determining factor for performance but as outlined above also crucial for determining the required level of investor attention. Being able to evaluate the sufficiency of the alignment package offered is therefore key and given the increasing complexity this is an area we strongly emphasise in the development of in-house resources.



Have you invested in property-based derivatives yet?


e've looked at these once but the market didn't seem to be very liquid. For example, for us to increase our allocation by 2%, could we buy E400m worth of real estate assets through this product? I would think that would be very difficult. I may be wrong, but is my impression.

When the market becomes more mature and you have more players then property-based derivatives may develop. But the fact that everyone is such a local player is another hurdle to overcome. If you could do it on the European level, it would help everyone get to the precise allocation they want.