Switzerland’s largest public pension fund, Publica, is making its first foray into international real estate, a strategic move it intends to inaugurate with the first investments in 2017.
David Engel, portfolio manager and strategist at the CHF37bn (€34bn) pension fund, told IPE Publica’s board of directors approved a 4% strategic weighting to foreign real estate in early 2016.
Publica is a collective institution that counts 20 affiliated pension plans, seven of which are closed to new entrants and 13 of which have active members.
The new international real estate strategy only applies to the portfolio managed on behalf of the open schemes.
According to Engel, the Pensionskasse has a relatively small – by Swiss standards – domestic real estate portfolio of direct investments but had yet to turn to the international markets despite having considered such a move for some time.
“Back in 2011, we looked into foreign real estate, but at the time we felt it was not sufficiently developed and that we didn’t have the capacity or capabilities to invest,” said Engel.
“Above all, it seemed very hard to us to reach the strategic goals we were after for that asset class. Since then, there have been some changes.”
Publica now feels better able to handle the complexities involved in investing in real estate abroad, and that the product range is now good enough to do so, according to Engel.
“Real estate is also attractive from an asset-liability management perspective, and we have room for illiquidity,” he added.
“With our size and internal resources, we can harvest what we call a ‘complexity premium’ in the area of international real estate.”
The first investments are planned for 2017.
The pension fund intends to proceed at “a slow and measured pace”, however, given the large increase in asset prices on the back of “the glut of money” pumped into the market by central banks.
Publica intends to invest in core assets for the most part but will consider allocating as much as 10% in value-added, according to Engel.
It will be open to investing across a range of structures but take its time to “grow into the market”.
Specifically, this means Publica will initially concentrate on open-ended funds, with a broad investor base.
The next step will be to act as sole investor in a segregated mandate or alongside a larger investor in a co-investment vehicle.
“In a final phase, we would maybe consider closed-end funds, club deals or joint ventures,” said Engel.
Geographically, half of the pension fund’s allocation is to North America, with 30% reserved for Europe and the remainder for Asia.
“Asia has high growth potential but few established products,” said Engel.
“There’s a lot happening there though, so, if at some point in the future we were to go further into foreign real estate, that could very well happen in Asia, although it’s much too early to say now.”
The rolling out of its strategy is roughly split into two phases, the first being to build a broad, diversified foundation of holdings in North America and Asia via core, open-ended funds.
This will complement Publica’s portfolio of Swiss assets, which will count towards the pension fund’s Europe allocation, according to Engel.
In a second phase, the pension fund will look to make more tailored investments – for example by way of a segregated mandate with a very specific strategic focus.
This could be on a particular sector, such as logistics, for example.
This, however, has yet to be decided.
Until then, the sector exposure of Publica’s international real estate investment will largely be guided by what is available in open-ended funds, said Engel.
Asked about the pension fund’s policy on taking into account environmental, social and governance matters as part of its real estate investment, Engel said energy efficiency had become an integral part of the economics weighed by any prospective buyer.
Overall, Publica is looking to implement its policy over a 4-6 year time horizon, according to Engel.