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Pension funds all over Europe are getting more and more involved in real estate, increasing their allocation, investing overseas or even investing in the asset class for the first time. However, pension funds in the Netherlands have often been trailblazers in real estate investment and many are already heavily invested in their home market and overseas.
One of the reasons for this has been the sophistication of the Dutch real estate market. Investors buying buildings directly can be assured of indexed rents, keeping their income from the asset in line with inflation. If indirect investment is preferred, the Dutch BI structure allows pension funds to invest in a securities product similar to a US real estate investment trust and offering tax-exempt, liquid exposure to the asset class. There is also a booming private funds market.
Significantly, two of Europe’s main real estate associations – EPRA (for listed real estate securities) and INREV (for private funds) – are based in the Netherlands.
Dutch real estate has been a top performer for pension funds. The Dutch foundation for company pension funds, the OPF, reported that real estate was the top performing asset class of its 140 member schemes in 2004.
The annual results of the schemes, ranged from 4.1% to 16.1% – with real estate yielding an average 12%. The returns on equity and fixed income were 9% and 7% respectively. In fact, real estate has been the best performing asset class in the Netherlands for over 10 years (see table).
As might be expected, the Netherlands’ largest pension fund, ABP, is heavily invested in its home market. At the end of 2004, 11% of its e168bn of assets were invested in real estate, with
a significant amount in the Netherlands.
ABP was previously a direct investor in real estate, but took the decision in the early 1990s to reorganise. It created funds to own its residential, retail and office investments and also invests in private funds and listed securities.
Rafael Huerta Torres, senior portfolio manager at European Real Estate, says: “Money is invested both through private vehicles and securities. Both types of investments provides ABP with a well diversified real estate portfolio in different types of sectors – office, retail, residential, warehouses, etc.
“The private vehicles can provide access towards certain types of sectors which one cannot invest in through listed real estate companies. On the other hand investing through securities does provide liquidity.”
He said the fund was currently favouring retail and “low to mid-end” residential real estate as investment areas as they have been the best performers over five years. At present, the Dutch office market is still suffering from a “massive oversupply” of office space and is not expected to outperform in the medium term.
ABP invests in Europe and the US in real estate, but sees definite advantages in its home market. “Rental contracts are indexed annually against Dutch consumer price index (CPI), which is helpful as the liabilities of the pension fund are also indexed against Dutch CPI,” says Torres. “Furthermore the Dutch real estate market is relatively better protected due to stricter planning rules. Furthermore the BI structure makes it attractive for ABP to keep investing in Dutch real estate vehicles and securities.”
However, the picture is not perfect, ABP says regulations imposed on commercial leases, put in place in order to protect tenants, can decrease flexibility on the part of the landlord.
Indirect investment in real estate has also been the primary choice of the ING Group pension fund, which has around e800m invested in real estate, with 18-20% in
the Netherlands. It has always had an indirect exposure and, until a year or so ago, invested exclusively through quoted vehicles, including Dutch BIs.
However, the group has since opted to diversify into private real estate funds and plans to invest 60% of the total into these vehicles, across about 25 funds. The pension fund invests in several Netherlands-only private funds, including a retail, residential and an office fund, with retail being the favoured sector at the moment.
Chairman of the investment committee of ING pension fund, Frank Bijleveld says: “We are focusing more on investing across Europe now in order to obtain diversity and also to target the higher returns which are available in some other markets.”
While ABP and ING pension fund view investment in Dutch real estate as part of a spread of investments across several countries and also take a balanced portfolio view, investing across all sectors, the pension for the building industry, the Bouwnijverheid, is far more selective. It has a very high weighting in real estate (27% at the end of 2004, from total assets of e17bn) but 80% of this total is in Dutch residential. The pension fund has taken the view that residential real estate is less subject to the corporate cycle than commercial real estate.
Rober Spaan, a portfolio manager for SFB, which looks after the Bouwnijverheid’s real estate, argues that while (currently underperforming) offices perform most in line with the economic cycle, they are the highest risk, whereas the demand for homes will always be strong through necessity.
He says the Bouwnijverheid is prepared to accept residential’s lower income return (5.5% annualised over 10 years, compared with 7.6% for retail and 7.9% for offices) in exchange for the decreased risk. In fact, due to increased demand for housing over the past 10 years, residential has actually outperformed all other Dutch real estate sectors.
Unlike ABP and several other Dutch funds, the Bouwnijverheid tends to invest directly in order to retain control over its holdings and to be able actively to manage them itself, hence its keenness to stick with the familiar home market. It is happy to undertake development projects and Spaan says the fund is currently working on a number of schemes where the use of a building is being changed from residential.

Dutch real estate performance in 2004
Last year saw a definite improvement in the performance of the Netherlands real estate market, halting the deterioration of the previous three years, the Investment Property Databank (IPD) reported in March.
Its Netherlands Annual Index showed all-property total returns, while still well below the peak of 16% in 2000, rose to 7.7% in 2004, from 7.1% in the previous year.
IPD said the key to the improvement was a small fall in yields, suggesting that an improvement in investor sentiment towards the sector was pushing prices up. However, rental growth remained weak, running at 1.2%.
The fall in yields was largely concentrated in the retail market and this boost to capital values meant that retails were the best performing sector in 2004, with total returns of 10.1%. By contrast, offices suffered a further small drop in rental values of 0.7% and this fall, combined with a marginal rise in yields, pushed capital values down by
-1.8% and reduced total returns to 5.4%.
Residential again saw the biggest increase in rental values and capital values among the three main sectors, of just over 3%, but total returns at 8.7% were below those in the retail sector, because of the lower rate of income return.
More detailed data showed that Amsterdam underperformed the national average in all three main sectors in 2004. The strongest retail location was Utrecht, with total returns of 11.4%, while The Hague was the best performing office and residential location.
Compared with other asset classes, real estate returns in 2004 fell almost mid-way between equities and bonds, which brought in 5.1% and 10%, respectively.
However, IPD said that, over the full 10-year history of the index, real estate has been the best performing asset class in the Netherlands, with total returns of 11.5% annually. Total returns on equities and bonds have been identical at 8.5%
annually.Mark Cooper

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