The Brussels-based pension fund for the doctors, dentists and pharmacists in Belgium, VKG/CPM has long been a substantial investor in real estate, with around 8% of the portfolio allocated to the area.
“In the past we had three buildings in the fund, the office the fund now occupies and two other office buildings in Brussels,” says Karel Stroobants, managing director of the fund. “We decided to exchange these two buildings for shares in a real estate investment trust.” The REIT chosen was the Belgian-based Confinimmo on which Stroobants took a seat on the board. One reason was that the REIT was new at the time and Stroobants was anxious to see how the operation worked.
“We did this because of the work involved in running the two buildings. We found we had more work looking after these than with all the rest of our investments!” But the fund decided to keep direct ownership of the elegant premises it uses in central Brussels. In fact, the fund is shortly to move out of this building because its operations are now too big and the building will become a facility for the members. “But the building will support the fund’s activities on the marketing and governance side, as it will be used for receptions and board meetings,” he says.
Confinimmo specialises in Belgian offices in Brussels and in Antwerp to some extent. “It is growing very fast and the aim is to make it the place to invest in the Belgian office market. We have taken over a few things and have others in the pipeline.”
The pension fund now wants to go international, but on the same basis as if investing in an equity portfolio, says Stroobants. “We want to diversify.” By investing through Confinimmo, the fund managed to diversify from two buildings to over 70 in Belgium, he points out. “But you are still in one economic area.” So the aim is to move into other economic zones and to look at other types of real estate assets, both residential and commercial. “This is something that is to be done later this year, in fact we are behind our schedule as we wanted to make a move six months ago.”
Having this further diversification is essential in Stroobants’ view. But it is not clear how this will be implemented at this stage. “Confinimmo is moving in this direction too, and as we are a stable shareholder, if both targets can be achieved together we will be happy to do this.”
But one thing he is certain about is that VKG is not going to build its own portfolio, but will look for a manager who can put together a portfolio of REITS or SICAFIs. “This manager will have to know how and when to move around the markets, when to go into commercial real estate in Holland and out of France, for example.” The portfolio will initially be concentrated in Europe and have some US exposures, but not include Asia, as the fund already has exposure through its equity investment in Hong Kong. “To leave out real estate in Hong Kong is difficult.” All in all he expects to add some new money to the real estate area and this could possibly come from reducing the real estate exposure within the equity portfolio.
As to what he expects real estate to deliver to the portfolio: “We want a better return than from bonds – that’s one thing. In my view real estate is a stable inflation-linked part of the portfolio.” But he believes there are opportunities for specialist asset managers to make money “but then it becomes like stock picking”. “You may have real estate in there, but you have an element of equity. It will follow the market cycles, but also depending on the quality of the management you have the issue of trading above and below net asset value.” An active manager who can play the cycles well can make more money for investors as well.
He says that from a value at risk perspective, real estate seems to bring “almost no risk to the portfolio”, as 90% of portfolio risk is in the equity component. But it is a question that he would like to research in more detail. “We do want to take more risk by active management in the portfolio, but that is intuitive, we don’t have the numbers yet.”