The €10.5bn Versorgungswerk for doctors in Westfalen-Lippe (ÄVWL) will take on a €200m real estate development project as part of its long-term strategy to generate stable returns and build sufficient risk buffers.
In recent years, the ÄVWL – joint winner of the 2013 IPE country award for Germany – has increased its investments to infrastructure and real estate, both via direct investments and loans for developments.
Andreas Kretschmer, managing director at the ÄVWL, told IPE the Versorgungswerk wanted to continue to build up these investments this year.
“We are about to close a deal on a €200m investment in a real estate project development in an inner-city location of a German city,” he said.
The development was sold by US investors that “do not want to do the refurbishment needed in the near future from their location and were looking for German buyers”, Kretschmer said.
He said the ÄVWL was able to take on this kind of development risk because it had been building up a sufficient risk buffer.
“Our main aim is not to achieve the highest return possible per year but to achieve stable returns over the long run,” he said.
For 2013, the Versorgungswerk reported a net return of 4.4%.
It also pointed out that it has used not even half of its risk budget, roughly 16% of overall assets under management (€10bn).
“This way we can ensure that, even if the interest rate environment remains low, we will be able to achieve our discount rate annually until 2018,” Kretschmer said.
With respect to equities, the ÄVWL will maintain a “low two-digit allocation” and “certainly not 30%”, making “tactical but not strategic adjustments”.
“There is too much volatility in equities, and this means it will crash at one point or another, and the equity market is very politically driven, as well as highly leveraged, which all means downturns can happen quickly and strain the ongoing return,” Kretschmer said.
Last year, the slight interest rate increase, as well as the sell-off in emerging markets, hurt the overall performance of the Versorgungswerk, while alternatives and real estate generated “above-average returns”.
For 2014, the ÄVWL will cut back on covered bonds and go into emerging government bonds, where Kretschmer now sees opportunities after the downturns in May-June 2013 and January 2014.
He said the Versorgungswerk’s anticyclical approach also suited a deal it was currently closing in London, where it is selling an asset bought in a fire-sale briefly after the Lehman crisis.
“We want to cash in on overheated markets,” Kretschmer said.
The ÄVWL said it it had been approached “a lot” for debt investments, which it will be “looking into”, if they generate sufficient returns at a certain level of risk.