Bayerische Versorgungskammer, Germany’s largest pension fund, is scaling back on US real estate investing for 2018, PERE has learned. A dramatic increase in hedging costs, as well as rising interest rates, are the main factors behind the decision, Rainer Komenda, head of real estate funds at BVK, told PERE during the MIPIM property conference in Cannes.
Over the past two years, BVK’s hedging costs for its US real estate investments have surged from approximately 50-70 basis points to 280 basis points, according to Komenda. “If it’s a normal core, core-plus deal that produces a 5 percent cash flow, you end up with a 2.2 percent return,” he said. “It’s too small to support our overall portfolio.”
The rising hedging costs is partly the result of disparity between interest rates in Europe and the US, Komenda noted. While the US Federal Reserve has raised the target range for the US federal funds rate from 0.75-1 percent to 1-1.25 to 1‑1.50 percent over the past year, the European Central Bank’s interest rates have remained unchanged zero, 0.25 and -0.40 percent for the past two years.
The increased costs of making a property investment in the US have led BVK to scale back its investment drive in the market. “It’s not to say we’ll completely pull out of the US, but we will slow down,” said Komenda.
In May 2016, BVK announced that it was planning to issue four US-focused specialized mandates to external managers, and last April, committed to a €750 million separate account to USAA Real Estate Company, the investment arm of financial services firm USAA, a €750 million gross real estate mandate to invest in core and value-add multifamily assets in the US.
Over the remainder of last year, the €80 billion pension fund awarded the remaining three mandates: a $460 million retail and office account to New York-based Northwood Investors; a $368 million logistics mandate to Cabot Properties; and $368 million niche property account to Chicago-based Harrison Street Real Estate Capital, targeting the student housing, self-storage, senior living and medical office sectors.
All of the mandates will be evergreen, with more capital to be committed to the managers once the existing equity has been fully deployed, said Komenda. He stressed that BVK’s slowdown in the US this year was a reflection of the pension fund’s decision, and not that of the country’s property market. “These managers are still finding decent deals,” he said.
However, to help offset the increased costs, BVK will now be seeking a higher net return target of 10-15 percent in the country. This has led the pension fund to have discussions with its US-focused managers, three of which had core or core-plus focused mandates, to move up the risk spectrum.
And despite the anticipated slowdown, BVK is still targeting a sizable amount of investment activity in the US. “I’d be really happy overall if these mandates would draw €500 million by year-end,” he said. “That would be absolutely fine.”
Additionally, BVK also expects that it will be able to maintain its 37 percent property allocation to the US, despite the diminished investment activity expected this year. “But if we end up with a lower number, we also have a chance to make it up in Europe and Asia,” said Komenda.
Indeed, the pension plan expects to invest €2 billion of equity globally in both private and public real estate equity in 2018. To achieve that goal, BVK currently is conducting two searches, one Europe-focused and one Asia-focused, for public real estate securities managers in an effort to diversify its existing real estate investment trust portfolio.