Investing in any kind of alternative requires care and skill. Real estate is a classic example. There are different ways you can get into this popular alternative and once in, running a property portfolio presents certain challenges - something Denmark's professional services pension scheme, PKA, knows only to well, with some 12.6% or €1.9bn invested in real estate by the end of 2006.

PKA is a collection of eight different schemes that invest collectively. Initially, its real estate investments were focused on housing in Denmark. This has gradually expanded into a much more diversified and active portfolio, and now includes non-domestic investments, welfare institutions, forestry, infrastructure and commercial property.
Aware of the specific skills and expertise running a property portfolio requires, PKA established a professional real estate service company which is listed on the Copenhagen Stock Exchange. The objective is to allow PKA to outsource its real estate interests to a dedicated real estate investment and management company. The other advantage of setting up a separate entity in this way is that other institutional investors can use the firm, maximising PKA's profits from property.


PKA's real estate subsidiary is called Dan-Ejendomme. It began life as more of a dedicated unit of PKA but evolved to take on a company status of its own. This led to a more active operating and business model and today Dan-Ejendomme administers more than 1,000 properties including some 45,000 apartments and 2,500 commercial units. "This makes Dan-Ejendomme the largest real estate administration company in Denmark, handling property on a commercial basis for a major portion of the country's institutional investors," claims PKA.

PKA says Dan-Ejendomme now has 200 employees and more than 600 building superintendents - skilled staff who can take care of almost all aspects of real estate administration. "Such skills would be very costly to establish for a pension fund alone. Using this set-up, PKA has managed to reduce costs, increase efficiency and optimise professional standards," the scheme explains. "At the same time, the result of the original outsourcing has become a very attractive investment. The eight PKA funds own 78.5% of the shares in Dan-Ejendomme. Over the years, Dan-Ejendomme returns have been very attractive," it adds.


Having established a successful real estate management operation, PKA next decided it was time to widen its net. In order to diversify it has expanded its real estate investments beyond Denmark, with the primary targets being the US and Europe. "We are focusing on investments in Sweden and Germany at the moment and have set aside €25m to establish ourselves in Russia," PKA says. As a result of its diversification programme, 7% of PKA's total real estate portfolio is now invested abroad, and this is set to triple in the coming years. "In three to five years up to €400m will be invested in foreign real estate."

PKA does not invest abroad directly, as most if its investments in foreign countries are primarily through funds. This, it argues, provides an opportunity to spread risk and to benefit from professional management in areas that a Danish investor may not be familiar with. One of its more recent projects is the creation of a fund in partnership with life insurance and asset management group Topdanmark to focus on the German real estate market. "This includes a professional German-based asset manager who will manage the portfolio," PKA says. "Other investors are invited to join the fund and overall the fund is expected to invest more than €225m. By investing as a group, the pension funds will find themselves with the financial muscle normally associated with much larger organisations," it adds.

Moreover, PKA participates in The Danish Real Estate Club, which received the award from IPE for outstanding industry contribution in 2006, and this serves as a means whereby Danish property investors can pool their expertise, contacts and due diligence findings and thereby reduce costs.

Timber has become a fashionable area to invest in recently and eager to jump on the bandwagon, PKA decided in 2004 to add forestry to its real estate portfolio. "This is considered to be an attractive investment and an effective way of diversifying the real estate portfolio."

According to PKA,  forestry has many redeeming qualities concerning risk calculation. For example it has long duration and acts as is a kind of commodity. "We have so far invested €100m in forestry, primarily in North America, South America, Australia and New Zealand." PKA adds the forestry portfolio is expected to rise to about €300m in the next three years, and its overall weighting in its overall portfolio is expected to double from 1-2% in the same period. "Forestry investments are carried out in co-operation with International Woodland Company, a company specialising in forestry investments and analyses."

In 2005 the return on PKA's investments in forestry reached an impressive 19.6%, falling back in 2006 to 6%.


Late last year, PKA once again went on the diversification trail and decided to invest in infrastructure projects, such as bridges, energy, transport of water and energy, around the world as part of its property portfolio. PKA says there are several reasons for this. "Infrastructure is similar to property in many ways. It offers long-term investment potential. It is relatively low risk and returns are generally stable." Investments in infrastructure will be carried out through funds and PKA says it expects the infrastructure weighting to increase from its current 0.1% of its overall portfolio to 2% - approximately €325m - by 2009.


PKA's good business acumen and sense of partnership has helped it build a very efficient property investment model that is opening more and more doors as the scheme explores way to diversify.

The creation of a separate management company opens the door to other institutional investors. The creation of a fund to focus on Germany gives it the scope to bring in German investment specialists.

Not content with just looking abroad for greater investment opportunities, PKA is ready and willing to exploit the growing timber and infrastructure investment markets too.