Pension funds in Switzerland have a long tradition of investing in property, and the team responsible for the Sfr18bn(e12bn) Novartis pension fund is not exception.
The Basle-based pension fund has for years had a significant exposure to real estate, around 12% of the total portfolio, through direct holdings in property, but their approach has just changed.
After discussing the subject for months, the fund has decided to sell their property holdings to Credit Suisse Asset Management (CSAM) and embrace a new indirect strategy to handle this part of its portfolio. Under the agreement between the fund and the asset manager, Novartis is selling around 100 properties to CSAM, in return for a stake in their property investment vehicles.
The properties, mostly residential, are valued in Sfr1.2bn, with around half of them located in the North West of Switzerland and a fifth in the Zurich area.
After the transaction, which should be completed in the next few months, the pension fund will invest only indirectly in property through stakes in CSAM funds.
The reasons behind this decision has to be found in the complexity involved in directly managing a real estate portfolio and the restructuring that the group has undergone since its creation in 1995 following the merger between chemical companies Sandoz and Ciba Geigy.
As a result of the merger there have been spin-offs typically resulting in the active members moving with the new organisation and the retired members staying with the group pension scheme, altering the ratio of active to retirees. Selling the property holdings means more liquidity for the fund and eases the management of this part of the portfolio.
Real estate accounts for around 12% of the fund investment portfolio. The rest of the assets of the fund are split into 50% equities, 30% fixed income and around 8% in mortgages and other areas.
The operation is not aimed to reduce the proportion of assets invested in property but to implement a more effective strategy.
“One of the reason why we decided to make this move was the fact than in order to manage a large property portfolio like ours, you have to have a lot of people looking working on it, in all the different location, and we don’t have these resources,” says André Ludin, chief investment officer at Novartis pension fund in Basle. “Because of this, we decided to sell our buildings but maintaining our exposure to property through investing in real estate funds.”
Finding the right partner for the operation was crucial, and due to the size of the portfolio there were only a couple of Swiss players that could handle the business.
“We are talking about Sfr1.2bn which is a large portfolio and there were only two houses we could work with, UBS and Credit Suisse,” says Ludin. “UBS wasn’t interested in the operation, so we finally opted for CSAM.”
Novartis considered that CSAM’s expertise in indirect real estate investment and its product range geared to the needs of pension funds, met their specific requirements and the agreement was signed.
Ludin adds: “We are now the process of making this exchange, and the whole operation should be complemented in the next three months. By then, we should not have direct real estate holdings, except perhaps some buildings that we need for the company but this is something that has not been decided as yet.”
Once this multi-step operation is completed, Novartis will primarlarly invest in three CSAM funds: the 1a Immo PK fund – Switzerland’s first tax-sheltered real estate fund -, the Real Estate Investment Foundation and in the residential property fund Real Estate Fund Siat.
Novartis is the first large pension fund in Switzerland to transfer its real estate holdings to a range of real estate investment vehicles. However the move to indirect real estate investment is a trend that seems to be here to stay.
Around 80% of the institutional investors surveyed in the 2001 Immobilien-Delphi survey by Andersen and Karl Steiner, who invest in real estate in Switzerland would be prepared to convert part of their portfolio in indirect investments. The difficulties of running a direct portfolio, where management is complex and tenants can interfere, is making the idea of securitising the real estate portfolio more popular among institutional investors.
In the case of Novartis the aim of the operation was to benefit pension fund members, by reducing administration costs and generally achieving better performance by improving geographical diversification
The purchase price was based in a DCF valuation by property consultancy Wüest & Partner. According to Markus Graf, managing director of CSAM in Zurich, valuation by independent assessors using a future-oriented method has proved very effective, ensuring negotiations were conducted under mutual trust and fairness.
Although sometimes trustees find it difficult to accept the securitision of property portfolios, it seems they have now become more aware of the fact that handling securities is easier than handling buildings, and that property funds give a diversification that would almost impossible to achieve by having direct real estate holdings.
“We will still have a significant exposure to real estate in our portfolio. This hasn’t changed,” says Ludin. “This move is only a switch from concrete to paper,” he adds.