The Dutch Pension Fund for the Construction Industry is set to boost its international real estate portfolio and believes Australia offers some of the best opportunities in Asia.
The management of the real estate assets, which account for 18% of the fund’s €29 billion, was spun off from the broader fund into a separate company, Bouwinvest, in 2003.
Most of the pension fund’s €5.3 billion property assets are concentrated on direct investments in its domestic market, but about 20% is dedicated to international markets. The fund wants to double this global portfolio, which stands at €1.3 billion, so that it accounts for almost 40% of its real estate assets by 2014.
Go east and down under
The fund’s current international exposure is focused on Europe and the US, making up 64% and 31% respectively. Although it intends to continue investing in these regions, the aim is to gradually lower European exposure to 50% in favour of Asia – tripling the region’s allocation to 15% of the global portfolio.
‘Right now we are increasing our international portfolio in Europe, but we are also looking at the US and Asia-Pacific,’ says Stephen Tross, Bouwinvest’s director of international investment.
‘In the Asia-Pacific region we have already invested in a number of funds and we expect to make our first investment in the retail and office sectors in Australia. The country has good fundamentals, it is a market where the population is still growing and the economic prospects look good. The economy is holding up well and you can also see it is profiting from its rich base of resources and the Chinese growth story.’
Despite the pension fund’s appetite to expand into Asia, Tross says the fund is run using a defensive risk profile that is spread across its entire portfolio.
‘In our expansion we are looking more towards Australia as it is a mature market, as well as Japan. It is more the developed Asia than the developing one we are keen to invest in.’
The majority of the pension fund’s international exposure is gained via unlisted real estate funds as Tross believes these often offer better options than listed real estate funds.
‘The benefit of unlisted funds is that we have more influence as we are big investors and often hold advisory board seats. Also these investments are not directly influenced by stock market sentiment.'
‘Another important feature is that they often provide a more specific and tailored strategy as many of them are smaller than listed real estate funds so it means we can pick one that fits us.’
That said, the market volatility of the past couple of months has encouraged Tross and his team to look at listed real estate funds due to their low valuations.
‘Momentum is returning for listed real estate funds because there has been such a correction in the equity market. We do have some listed securities in our international portfolio and want to increase our exposure in that area. The current market correction can make the timing for this more favourable.’
While market uncertainty creates opportunities, Tross says downside protection should still be a priority for all big real estate investors.
‘We look for more stable and core investments and returns without using aggressive financing. Income producing properties with long leases in good locations and markets still offer us these opportunities. Market confidence has less effect on well located properties where you have good tenants for the next 15 years or so.’
Tross’s portfolio covers office, residential and retail sectors with a current bias towards the latter. Although Asia is an important part of Bouwinvest’s plans, Tross says his most recent purchases have been in the European retail sector.
‘During the downturn we did not make many new investments but we have since started making new purchases, mainly in our international portfolio. We entered into a joint venture with a Canadian pension fund and an asset manager and bought into four shopping centres in Sweden and two in France.'
‘We felt that the retail market had some good opportunities, especially in Sweden where there is economic growth and the forecast looks bright. The country held up well during the downturn and is performing better than many other countries or regions.’
Since the financial crisis Tross says he has been looking more closely at the advantages of entering joint ventures.
‘We have a preference for joint ventures. You have much more control in a joint venture than you do if you are a small investor in a large real estate fund.’
This article originally appeared in the September 2011 edition of Citywire Global.