Aberdeen Asset Management’s new mandate to manage the direct property portfolio of Danish charitable foundation Aage V. Jensen is part of a trend among global institutional investors, which are seeking external managers to run their existing direct real estate holdings.
Under terms of the deal between Aberdeen and Aage V. Jensen, the Scottish global asset management firm will manage €170 million of real estate for the Danish foundation, which up until now has managed the assets internally. The portfolio consists of 17 Danish residential and commercial properties.
Tonny Nielsen, Nordic head of investment management at Aberdeen, said his firm expects “more investors to follow this trend.” Indeed, other industry experts predict more European-based institutional investors will outsource management of their direct real estate investments as well.
In the US, this trend is nothing new. Most institutional investors in the States can’t afford to employ a full-time staff of real estate professionals to oversee the day-to-day management of properties in their portfolios. Not only that, most pensions in the US are given tax breaks for being ‘passive investors,’ so it’s not in their best interest to be active operators.
Canada, meanwhile, takes a different tactic. Most large Canadian pensions maintain management of their direct investments through property firms they own. These firms operate as standalone companies and typically have hundreds of employees to manage their real estate investments. Examples include the Ontario Municipal Employees Retirement System’s Oxford Properties Group, Caisse de dépôt et placement du Québec’s Ivanhoé Cambridge and Ontario Teachers' Pension Plan’s Cadillac Fairview.
So is there a strategic advantage to be had in institutional investors entrusting fund managers to oversee their direct real estate investments or is this merely a cost-saving measure?
Ultimately, it all boils down to whether institutional investors want to maintain real estate expertise internally, as well as the control that comes with it, or if they would rather give up some control and pay a small fee in exchange for a greater amount of external expertise. With a number of European pensions invested in direct deals (as opposed to commingled funds), we may see more of them outsource the expertise to oversee such in-house portfolios.
Additionally, for public pensions, cost is another factor. Employing a full-time staff to oversee one’s portfolio can be a costly endeavour, particularly if one is looking for people with the right expertise. In a sluggish economy, US public pensions are under pressure to cut their budgets from state and local governments. Meanwhile, in Europe, austerity measures are putting similar pressures on large pensions there. Ultimately, these pensions can’t afford to keep several real estate professionals on the payroll. As a result, it makes sense to hire a firm that knows the ins and outs of the system to handle the day-to-day aspects of such portfolios.
We here at PERE wouldn’t be surprised if this trend continued to grow globally, but particularly in Europe, over the next few years – especially when investors are cutting budgets and having to reconsider what their internal core competencies should be.