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For all its drawbacks – poor liquidity and periods when vacancy levels are high – property is a good diversifier. Pension funds in the Nordic countries recognise this, and many now have firm plans to spread their real estate investments beyond their national boundaries.
“We are looking into diversifying our property,” says Pernilla Klein of Sweden’s AP3 pension fund. The fund holds Skr7.6bn (e827m) in property investments – all invested via AP Fastigheter, the Swedish property holding company owned by four AP funds. But in the future, the fund may venture into different types of property ownership.
Already, the asset class provides real diversification benefits within the asset base of the fund. “From a portfolio perspective, property is a good diversifier,” she says. “We’ve seen that in our ALM studies. Our intention is to increase property within our reference portfolio.”
At the moment, AP3’s reference portfolio has 8% of assets in property holdings, and the fund plans in the short term to increase this to 8.5%, she says. The decision to raise this allocation was taken about a year ago, but the move has yet to be implemented.
Exactly how the property holdings will be diversified, and which type of investment vehicle will be used to effect the change – or whether direct property holdings will be used – has yet to be decided. “It’s still a project,” says Klein. The fund doesn’t rule out looking towards other countries for the planned additional property holdings.
Storebrand life insurance in Norway holds less than 10% of its assets in property, says Per Mortensen, head of property at the institution. All the domestic property holdings are direct, while the international component of the allocation is held through private investment vehicles.
“It gives us a stable income, it’s an inflation hedge – which is very important – and it has a low correlation to other asset classes,” says Mortensen.
Storebrand sees its total exposure to property remaining at about the same level for the foreseeable future. “It will be at the same level, but we will invest more internationally,” he says. Part of the rationale behind moving into more international real estate has to do with the benefits of diversification, but this is not the whole story. The institution sees that by broadening the pool of available investments, it increases its chance of finding good investment opportunities.
Performance from the asset class has been good in recent years, says Mortensen. Though the international holdings are too recently acquired for it to be possible to make much of a judgement on performance, the holdings based in Norway have brought in a total return of about 9%, he says. As a benchmark, the insurer has just introduced IPD’s new Norway index. “This is quite new for us, but we will use it as our benchmark,” he says.
ATP, the largest Danish pension fund and sixth largest pension fund in Europe, is a big property investor, and has been so for many years. The fund has a portfolio of 110 properties, which are mainly office and retail buildings. The portfolio is worth around E1.5bn. “It’s still our intention to become one of the most active players in Denmark,” says Michael Nielsen at the fund. “But Denmark is quite a small, and non-liquid market. It is very difficult to get risk diversification here.”
A few years ago, ATP revised its investment strategy, upping the real estate portion of its overall assets to 5% from 3%. By doing this, ATP has set itself the target of investing a further E600m–800m. To realise this, the fund will have to set its sights outside Denmark’s borders.
ATP opted to implement the increase using managers in the European property market, says Nielsen. The fund will invest indirectly, focusing on non-listed property funds. The aim is to get diversification in terms of country, manager, property sector and investment style.
Since it decided to boost the property allocation, the fund has acquired stakes in seven property funds – a total investment of E300m. “In rough figures, we are a third of the way through the programme.”
Performance so far has been as expected, says Nielsen. There has been an increase in vacancies in the past year or so, and with indirect investments of this type, he says, it is normal to get zero or low returns for the first few years.
IPD produces an index for the Danish property market, which is used for the fund’s direct property investments, says Nielsen. “But we don’t have any benchmark on the property funds yet.”
Finland’s E14.5bn Ilmarinen Mutual Pensions Insurance Company is the second largest private property owner in the country, with roughly E2.4bn invested in the asset class. This equates to about 15% of the fund.
Tino Kankuri, head of property, has been at the insurer for six years. “When I joined, property was a little over E1bn, and the weight was 7–8%,” he says. Then, in 2000, the company acquired Alexia from Nordia Bank, which increased the weighting dramatically. The acquisition was made not because of a strategic decision to raise the property allocation, but because the investment opportunity presented itself. “Basically, it was a good deal,” says Kankuri.
“In our overall asset allocation, the role of property has been capped by convention,” he says. It was not that there shouldn’t be more, but there were difficulties in the logistics of raising the weighting, especially since Ilmarinen is such a big player. “To increase the investment in property, you had to make large moves,” he says. So when the Alexia deal came along, Ilmarinen took it.
Performance from its property investments has been stable recently, Kankuri says, although there have been some problems that have affected the whole market. “The percentage of vacant space has increased, but in a large portfolio, this only affects 0.1% or 1.2% of the return. But it is still an issue.”
The company only makes direct investments in property within Finland itself. But there are moves to invest outside the country. Last year, Ilmarinen completed its property investment strategy, and is now doing due diligence on various European property funds. “The first commitments will be made within a few months,” he says. The move abroad, and into funds, is part of its aim to achieve diversification.
Ilmarinen keeps an eye on property indices but does not use one formally as a benchmark. “We benchmark ourselves against other types of investment,” Kankuri says.
PKA, the management company for several Danish pension funds, holds 7–9% of its assets in property. It is hard to say precisely how much, because this asset class is divided among various funds, each with different ages, or different cash flows, says Troels Gunnergaard.
The majority of this is invested domestically. “We do all the Danish investment directly, and we invest in the UK through Britannia Investment,” he says. But this fund is yet another with plans to spread its wings.
“We will start investing outside Denmark this year. We want diversification and we also want to increase the proportion of property within the portfolio,” he says. To start with, PKA will be looking at Europe and the US, later, perhaps, at the Far East.
Performance has been good in the past few years for the asset class, he says, with returns satisfactory.

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