“Do I think people are being cautious? I don’t see it,” Rainer Komenda, head of real estate funds at Germany’s biggest state pension provider, Bavaria’s Bayerische Versorgungskammer, says. “We’ve had five years of markets peaking and cap rates threatening to climb, but people have been consistently wrong in their forecasts and are now feeling conditions will go on for longer.”
With almost 24 percent of the pension’s $88 billion in assets allocated to real estate, BVK is one of Europe’s most sought-after institutional investors, a fact not lost on Komenda. But while he is happy to receive continual pitching from private real estate managers, he welcomes approaches recognizing the market’s broader downturn.
“Post-GFC, values have gone in one direction: up. But I don’t expect that to last. It might flatline at best. That means we need to maintain significant cashflow to maintain performance.” Komenda declines to discuss specific performance numbers, but PERE understands the pension is aiming to provide distributions to its pensioners of 4-5 percent a year from a portfolio-wide performance of approximately 100 basis points more. Managers working with BVK over the coming years should have these numbers front of mind.
Komenda says BVK is future-proofing its real estate exposure to withstand a 5-10 percent devaluation, on the proviso the assets’ income profile remains consistent. “Even in the GFC, we didn’t see a fall away of more than 10 percent.”
The forward plan, however, will need some maneuvering by BVK’s 130-strong bench of investment and asset management professionals. Atop the agenda is exiting properties Komenda describes as not being “through-cycle.” He envisages BVK offloading some €500 million in assets on a piecemeal basis. On the block are certain retail properties, business parks and assets regarded as Grade B. “It’s an ongoing process, but one that is now more important as the portfolio stabilizes,” says Komenda.
“We’re not trying to get our managers to go for 6-7 percent. We are pushing for them to work on NOI growth, not wheeling and dealing”
Of chief importance also will be to reduce and elongate the portfolio’s debt. On a blended basis, across risk-return profiles, the pension’s loan-to-value ratio is around 48 percent, but Komenda would see this reduce to 40 percent.
“We want longer debt, too,” he said. “That’s not possible in every market, but ideally, we’d be looking for at least seven-year debt, better still 10.” Currently, much of BVK’s property is leveraged with approximately five-year debt. “We still have managers gearing at shorter terms to boost their performances. But I don’t mind losing a little performance.”
Indeed, in general, Komenda suggests managers keen to do business with BVK do not needlessly overreach on performance. The pension’s 2020 plan includes approximately €1.5 billion in new mandates, with Asia and US markets expected to feature. Managers successful in receiving some of this equity will have met the 4-5 percent performance requirement on a recurring basis. “We’re not trying to get our managers to go for 6-7 percent. We are pushing for them to work on NOI growth, not wheeling and dealing.”
BVK’s 2020 defensive strategy
Target performance: 4-5%
Accepted devaluation: 5-10%
Planned sales: €500m approximately
Portfolio-wide leverage target: 40% LTV
Target debt tenure: Seven to 10 years
New mandates: €1.5bn
Sophie van Oosterom, chief executive officer and chief investment officer for EMEA at CBRE Global Investors, says the Los Angeles-headquartered manager for one is deliberately marketing “sustainable performance” within certain of its European offerings, an example being its pan-European impact fund targeting low-middle income affordable housing investments. The fund limits rental growth to inflation to ensure affordability ratios.
CBRE Global Investors is one of BVK’s managers. “It is similar for debt,” she adds. “We typically raise debt for the duration of our long-term business plans, plus two additional years, to optimize security of term, margin and prepayment penalties. In the current long-term, low interest rate environment, we are increasing terms of these loans even further. I would assume other managers are doing the same.”
Mark McLaughlin, managing director, Europe at rival manager Cromwell, says his firm is another designing debt plans suitable for the current market conditions. Though not a BVK manager currently, he says: “We might use short-term debt to ensure we match exit strategies where we don’t want high breakage costs impacting the business plans. However, looking at current strategies, the majority of our debt will have maturities of five years-plus so we have some certainty on our cashflows and covenants, with sufficient headroom in the event of a downturn.”
Komenda is talking to PERE at the EXPO Real conference in Munich last month.