MN, one of the largest pension fund administrators in the Netherlands, is boosting the size of its commitments to residential real estate in a reflection of its clients’ increased confidence in the sector, PERE has learned.
The investor, which currently allocates €9.78 billion to real estate out of a total €130 billion in assets under management, committed €400 million in seed funding earlier this month to London-based manager M&G Real Estate’s new open-end European Living Property Fund.
According to Joep Barten, real estate portfolio manager at MN, the move is the fourth in a series of larger-size commitments to residential funds that MN has made recently on behalf of pension fund clients Pensioenfonds Metaal & Techniek and PME pensioenfonds. The prior three commitments included €500 million to abrdn European Residential Property Fund, €400 million to CBRE European Residential Impact Fund and €400 million to Patrizia Living Cities Residential Fund.
“In the past two or three years our clients have grown commitments [to residential]. When we started their strategy about seven years ago, we took a more cautious approach for our clients and committed €75 million-€100 million each,” Barten told PERE. “Over time this has grown as their confidence has grown, and now commitment sizes are around €400 million-€500 million if both decide to join.”
For MN as a cornerstone investor, being able to establish the fund with long-standing partner M&G in a “co-production” was critical to executing on their clients’ mandates. “This is something we started doing five years ago, only two years after we implemented a core strategy for both clients,” said Barten. “We figured out that if we want to have a 100 percent match with the requirements of our pension funds within our real estate portfolio, it’s getting more and more tough to find the right kind of product.
“You can find a product that matches those requirements by 70 or 80 percent, but never 100 percent. That’s why we began setting up funds with GPs, as we have also done with Barings and AEW.”
MN is looking for a total return of approximately 5-7 percent on average from its residential portfolio over a 10-year period. “This number is based on the long-term experience from both clients through their direct portfolio in the Netherlands,” explained Barten. The investor’s allocation to residential on behalf of its clients currently sits at approximately 30 percent of its real estate portfolio, but when recent capital commitments are called up, Barten expects that number to rise to around 45 percent. That is in line with MN’s target, but there is plenty of room to grow beyond that, he added.
MN’s residential push comes at a time of deep-seated disruption in real estate markets globally, but Barten emphasizes that “residential is a long-term investment approach.” With that in mind, the open-end fund structure and geographical flexibility of the new M&G fund are important to the investor.
Barten explained: “We have a country weighting in our overall mandate, so on a higher level look into the portfolio for PMT for example, we make sure that around 30 percent is in Germany or in France; the Nordics weighting is around 10-20 percent. We have these limitations in our general mandate, but we don’t want funds to be specific on one country – for all four of the residential funds we have committed to, we like an overweighting to the German market, but importantly it also comes down to government policy on a national or local level.”
For example, “if regulations kick in and that has a negative effect on return forecasts, then we want to make sure we can go to other geographical areas,” said Barten.
‘Grow into the billions’
In addition to MN’s seed capital, M&G launched European Living Property Fund with €178 million from an M&G internal client fund, which is increasing its exposure to European alternatives, bringing the total fund size to €578 million at launch. “We expect the fund to grow into the billions in due course,” said Alex Greaves, head of UK and European Living at M&G Real Estate.
Greaves told PERE that the new fund is the “little brother” to the firm’s European Property Fund, a multi-sector open-end vehicle established in 2007 that currently sits at around €5 billion in size. The “big sister” in the family is the UK Residential Property Fund, M&G’s first residential-focused vehicle, launched in 2013 with £1.3 billion currently under management.
“It was a natural fit for us to combine the Living capacity and the skills of our talented team based in the UK with the big platform that we have in Europe, and to add residential into that platform and grow it going forwards,” Greaves explained.
Student housing, single and multi-family, and retirement living are the key focus areas for the pan-European fund. “We added retirement and student living into our latest product in 2020,” said Greaves, tapping into sub-sectors he believes are a perfect fit with Europe’s multi-jurisdictional landscape and the high level of need for these four property types.
With the backing of long-term institutional partners such as MN, “we can get the appropriate reward in each of those locations depending on the stage of maturity those different countries are at,” Greaves explained. “It’s return driven, and it’s based on a risk we are prepared to take.”
The fund is targeting a 5-7 percent total net return on an ungeared, unlevered basis, with a cap of 30 percent LTV for its investments. The fund has made one investment so far, acquiring an Art Nouveau serviced apartment building close to the central business district of Helsinki, Finland, for €75 million. The recently refurbished Ankkurikatu 5 Helsinki building is rated LEED Platinum.
The new fund will be led out of M&G’s Frankfurt office by Marcus Eilers, head of European residential. He told PERE that the fund has a 40 percent allocation to ‘core’ European markets such as France and Germany, with 20 percent weightings to the Nordic, Benelux and Southern Europe markets.
“We do see that right now we can be competitive in situations where we would not have been competitive six months ago, and that’s an opportunity,” said Eilers. “It’s a great situation to be in: to have money to spend but no actual pressure to spend quickly. That means we can choose the best assets for our risk appetite, in an environment where not everyone is moving. We really like the spot that we’re in right now.”