America's engine room
It may be a long way from Europe to the Big Apple, but that isn't stopping pension funds pondering the pros and cons of buying a slice of its real estate."New York City has always been in the top five cities for property investing because- along with London and Tokyo - it is one of the alpha cities in the world," says Steve Laposa, director, global real estate research group, PricewaterhouseCoopers.
"Most international firms have offices there, and these same firms also have offices in London and Paris," he says. "So investors feel comfortable because they know the tenants. They also understand the markets - it is easy to get information about sales and transactions."
Furthermore, Laposa says that European pension funds also gain a degree of confidence from seeing other institutions investing in the same markets.
"The French and Germans are buying in New York, and also large organisations like ING," he says.
The main drawback is the currency risk - at present, the US dollar is not doing well against other currencies. "Another issue is terrorism," says Laposa. "New York City has been hit once, and there have been scares in the years since. But at the same time, it has rebounded. We haven't seen a lot of companies fleeing the city. And terrorism is now as much a threat in London and Berlin as it is in New York."
"Most pension funds like to diversify, and real estate is a very important part of that," says Georg Inderst, independent consultant. "The general trend on the Continent has been to invest in real estate domestically, but in recent years, there has been a move towards strategic international diversification."
Typical of this change in attitudes is Danish pension fund ATP, which holds its real estate through several property funds.
But Michael Nielsen, managing director, ATP Real Estate, says: "We have been active in the European market in the past five years and it is time to start a programme of diversification. We have decided to start looking at the US market and I am sure we will allocate some investments to the US in future, and those are likely to include office-related investments in New York."
One of the advantages of the US as a whole, says Nielsen, is that it is a mature market compared with Europe.
"In the US, we will find more of a transparent property market, especially in the industrial sector," he says.
Nielsen says that ATP's investing process for US real estate will replicate its process for investing in Europe.
"Our own investment team will run the process," he says. "No doubt, however, we will also team up with external advisers."
Nielsen says he does not foresee any specific problems related to New York, compared with the US in general.
"We will be looking at retail funds and logistics funds as well as offices," he says. "However, our overall strategy gives us a large exposure to offices. The exact percentage will depend on whether we find quality products; if so, we will go for unlisted investments."
The New York office market in particular is attractive to institutional investors. One pension fund manager points to its pre-eminence worldwide in terms of tenants with excellent solvency, as well as above-average transaction volumes. And he says that rental levels are currently increasing significantly.
The use of funds to hold property investments has increased over recent years, according to Inderst.
"Hardly anyone goes into real estate directly any more," he says. "If you go direct, you need enormous resources for managing the property, with issues like tenancy agreements to deal with. So the trend has been towards specialist investment going through funds, and that will continue."
Inderst says that one main issue is liquidity.
"It is difficult to get out of property held directly, and transactions can take a long time," he says. "That means that pension funds cannot quickly change their allocation, or rebalance the portfolio."
Most European pension funds investing in the US do so through pan-US funds and therefore look upon New York City property as part of the diversification mosaic, rather than as a niche in its own right.
Dutch pension fund ABP is one of the few pension schemes with a portfolio big enough not only to justify an office in New York, but also to look on the city as a location in its own right. Even so, it does not buy buildings directly. Instead, it invests indirectly through publicly-traded REITs and private funds.
Barden Gale, managing director and chief investment officer, real estate, ABP New York City, says: "We do look for NYC exposure where possible, of course with the right managers and the right strategy.
"Finding investment opportunities in any global gateway city is desirable in general, but particularly in the case of New York. But it is a difficult place in which to find deals and perhaps more difficult to execute a business plan, so it is important to have the right partner."
Barden says that NYC exposure among the publicly traded REITs has been growing rapidly - especially in offices, hotels and the rented residential sector.
"The companies which have this exposure tend to trade at a premium due to the growth potential of the assets," he says.
"Furthermore, private funds which have executed a NYC strategy in whole or in part have also done extremely well."
Barden says that one interesting area ABP is investing in is the so-called "rent stabilised" apartment sector. These are not public housing projects, but privately owned. Very often the properties are located outside Manhattan, or at least north of 96th street. Rents in these properties are regulated, as long as the tenant does not earn much more than US$175,000 (€137,000) and the rent is less than US$2,000 per month. However, the landlord does get "operating cost" increases and is allowed to pass on the costs of long-term improvements to the property.
"With 1% vacancy rates in the city, this means the cash flow is very stable and the rent is somewhat protected against inflation," says Barden.
ABP carries out its strategy in this sector with New York-based managers, Apollo Real Estate Advisors.
Barden says ABP has also invested in office funds where the managers have a competitive edge in buying and operating NYC offices.
"Tishman Speyer - the international fund manager based in New York and specialising in the office sector -- is a good example of this," he says. "But even then, though, you will not get 100% NYC exposure.
"We really like to get exposure to the city, but it is difficult for an indirect investor to find a great manager with a fund whose interests are closely aligned with ours."
"The New York office market seems to be recovering and to be strengthening even further," says Werner Sohier, head of real estate for the US with PGGM, the pension fund for the Dutch healthcare sector. "Along with the rest of the US, it is showing some economic growth, and because of the relatively modest supply of new product coming onstream and vacancy rates going down, landlords are no longer being forced to offer rent-free periods in order to let offices."
PGGM holds real estate investments throughout the US, and all are held indirectly, through private funds investing in the US and through its REITs portfolio.
Sohier says: "Our approach is that we have a view on each sector, and look for the best manager for that sector or region. Once we have invested, we keep tabs on the fund via a seat on its advisory board. We rely fully on the manager to make decisions, but we can quickly see whether what is being bought is meeting our requirements. Equally, when we want to exit, we expect to have influence over how that is achieved."
However, not everyone is as enthusiastic about New York's prospects. "The US property market has been overheated, and is suddenly starting to cool down, so I am surprised to see people tactically participating in those markets," says Inderst.
Gail Moss is a regular contributor.