A great Dane goes global

Denmark’s biggest pension fund manager PFA is on a worldwide assault. Real estate head Michael Bruhn talks to PERE.

Danish pension fund PFA is on an investment odyssey aimed at firmly establishing its international property credentials.

Forays for the Copenhagen-based investor have been diverse, but they demonstrate an appetite for engaging greater risk, new trends and a capacity to issue big tickets.

Bruhn: has seen a 10 percent
international real estate exposure become 50 percent

Examples of PFA deals include the largescale repositioning of commercial buildings in the heart of London for co-working office use and the backing of a greenfield logistics development program in China. They demonstrate PFA’s appetite to go big on the global stage.

In August, it made a record international outlay: the $1 billion acquisition of a residential portfolio across cities in Germany.

Leading PFA in this global charge – and telling PERE all about it – is Michael Bruhn, its head of real estate. He says his employer is by no means done and onlookers should expect to see much more from Denmark’s largest commercial pension fund, which has total assets under management of $84.5 billion as of year-end 2017.

Managers will be interested to know that while PFA does not put specific numbers to its return expectations, the return on real estate investments for 2018 so far is expected to top the 8 percent achieved in 2017. Bruhn expects that level of performance or above in the coming years.

“We do not have a significant backflow requirement on investments throughout our portfolio in the coming years, so it will make it easy to hit our target volume in the short-term,” he says regarding the forecast of reinvestments of capital flowing back from realized real estate investments.

“The backflow will increase from 2020, and, combined with continuous pension deposits increasing the balance, we then have some busy years ahead of us. The level of investment volume increases we have seen in the last three years will carry on in the coming three to four years.”

Indeed, the size of PFA’s real estate allocation, including unrealized commitments, more than doubled from year-end 2014 to year-end 2017. The allocation after the German deal stands at $10.4 billion, an increase of 24 percent since year-end 2017.

The allocation is today roughly split evenly between domestic and international markets, a far cry from when Bruhn joined PFA in March 2013, when 90 percent of the real estate allocation was in Denmark. PFA is aiming to grow the international holdings to 65 percent of the total.

Bruhn believes PFA’s domestic allocation of DKr30 billion ($4.7 billion; €4 billion) will not move above that level, due to liquidity concerns in the Danish market, leaving room to further its international allocation by $3 billion-$4 billion in the coming years.

All that is possible within a current 9.5 percent total allocation to real estate. As with all stewards of institutional investment portfolios, whether there is any further movement in terms of commitments to the asset class depends on the denominator impact on other investment types. But even with that considered, Bruhn can imagine PFA’s real estate increasing another 50 percent.

Following mega-trends

In terms of geographical focus, PFA intends to split investments 50 percent in Europe and 25 percent each in the US and Asia-Pacific markets, with the caveat that those numbers are also subject to change should the pension fund deem it necessary for pragmatic reasons.

“We are not measuring allocation after a rigid distribution of location or asset type,” says Bruhn. “We are driven by good investment opportunities stemming from mega-trends. So, when an opportunity like the recent residential portfolio acquisition in Germany emerges, we are agile enough in our investment strategy to take advantage.”

To that end, and again like many of its institutional peers, PFA is investing in assets that demonstrate they can benefit from megatrends including urbanization, longer life expectancy and growing middle-classes.

The latter of these trends in China, for instance, makes PFA believe in a continuous growth in e-commerce consumption. That prompted PFA to partner with the Canadian investor Ivanhoé Cambridge to invest in the pan-Asia logistics operator LOGOS’s third China venture in October 2017.

The club vehicle is developing almost 13 million square feet of logistics that will be valued at approximately $1.2 billion. Teaming with an operator like LOGOS was key, according to Bruhn, both for ensuring alignment and for enabling it to gain first-hand knowledge of markets.

The operating partner was also critical to PFA in London where it purchased a 45 percent stake in the £580 million ($747 million; €645 million) acquisition of Devonshire Square, a 620,000-square-foot office complex in the City of London in April. London-based investment firm TH Real Estate took a 45 percent stake, while New York-headquartered co-working operator WeWork took up the remaining 10 percent as operating partner.

“We find partnerships with operating partners aligned in investments exciting,” says Bruhn. “When we invest together with WeWork, we know that co-working as a concept might change over time, but we believe the trend is here to stay and we want to get in early and gain knowledge.”

Overall, the mega-trends approach aims to ensure the value longevity of PFA’s real estate investments. By that token, further bolstering the relevance of the portfolio, future investments will also have environmentally-friendly elements to them.

“Sustainability will be higher on our agenda in years to come, and we are not just talking about putting solar panels on the roof of assets. We are thinking long-term durability with a focus on building materials, because we believe it will be a part of future demands,” says Bruhn.

Around the world for bigger tickets

Of course, with PFA now doing the lion’s share of its real estate investments outside Denmark, team travel for investment opportunities has changed from a few hours behind a wheel into long-haul flights around the world.

“An international investment strategy requires that you stick to your presence,” Bruhn emphasizes. “Therefore, I have told my investment team if they want to be a portfolio manager for a given market abroad, then they must realize that such a prominent position is followed by the need to travel to every advisory board meeting. That is where we get the inside on investments and meet the peers who also take big tickets and are potential partners.”

This tack leads to bigger ticket possibilities and that leads to better fees, conditions and rights for spots on advisory boards or investment committees.

There is something of a second phase in all this. Prior to moving into new asset types in new markets, PFA has always entered via blue-chip funds. Before making the plunge into China logistics with LOGOS, for instance, PFA first committed to Morgan Stanley Real Estate Investing’s maiden core property fund in Asia, Morgan Stanley Prime Property Fund Asia.

Then, as the knowledge of a market improves, Bruhn pushes for more specific investments, increasingly executed through co-investments, club vehicles or partnerships.

“PFA’s internal structure is shaped to facilitate direct investments anywhere in the world, ensuring maximization of our playing field. Still, some types of investments have a structure where funds are the obvious investment strategy,” says Bruhn.

He still favors investing, for example, through an opportunistic global fund with Morgan Stanley Real Estate Investing, as it brings a chance to tap into its huge network and diversification. In other cases, some strategies are so niche it makes better sense to back a specialist manager’s expertise. PFA has invested in a data center fund in Singapore-based asset manager Keppel Capital, for instance.

PFA has established decent positions in certain international markets, although Bruhn admits it is behind peers in others. It arrived late in China, for example, and also has struggled to buy into India’s housing market, although it has been closing in recently.

“We have been looking at middle-class residential in India for a long time without finding the right entry with the right partner. This mega-trend in India is well-known, but it will carry on for the next 20 years,” says Bruhn.

In more developed economies and markets – with megatrends front of mind – PFA wants to develop better exposures to sectors like last-mile logistics and medical offices. Certain residential strategies – such as senior and assisted living, student housing, and long-stay hotels – also appeal to the pension fund.

With $3 billion-$4 billion of firepower to get these expansions done, it would be unwise to bet against deals in these areas materializing over the coming years. This is one investor intent on becoming an international mainstay after all.

A partner with efficiency and speed

Swift execution is a characteristic of the Danish pension fund, say its partners. As PFA has moved into real estate partnerships around the world, its investment approach has been duly noted.

“We have been impressed with the way they approached the partnership. They are certainly like-minded: we have similar views on investment style and risk management. Efficiency and speed have been differentiating factors in our coming together as partners,” says Rita-Rose Gagné, president for growth markets at Ivanhoé Cambridge.

The Canadian investor has partnered with PFA in a club fund logistics vehicle in China that develops assets for a long-term hold. Here, their operating partner, Sydney-based logistics specialist LOGOS, has also noticed the Danish pension fund’s ability to execute.

Talks with PFA started in the beginning of 2017, and the club closed in October that year. John Marsh, joint managing director and co-founder of LOGOS, defined it as a relatively short process leading to its closing, notable given PFA were new partners for them and entering a new market.

“PFA had a very efficient and small team to deal with during the due diligence, making it an easy process. As we moved into the operations of the fund and approval of projects, they have been very pragmatic. They ask us all the right questions, but they allow us to do our job,” says John Marsh.

In London, PFA teamed up with TH Real Estate and WeWork to reposition office complex Devonshire Square into a modern co-working-led asset. Again, Nick Deacon, head of European offices at TH Real Estate, highlighted how swiftly PFA was able take on a deal with complexity.

“We had a couple of conversations with investors, but it was apparent very quickly that PFA were keen on the concept, wanted to explore it, and moved very, very fast to get up to speed with the opportunity. They meet with us and WeWork in London to negotiate a deal during January and February before announcing the deal in April,” says Deacon.

All three organizations tell PERE they are keen to explore further partnerships with PFA.