What PFA’s record $1bn investment in Germany says about its real estate ambitions

The Danish pension fund is looking to increase and diversify its international real estate investments.

The Copenhagen-based pension fund PFA invested DKr6.6 billion ($1 billion; €885 million) in a German real estate portfolio earlier this month. PFA acquired the portfolio of 34 primarily residential assets from the Frankfurt-based real estate manager Industria Wohnen.

PERE spoke with people familiar with the transaction to analyse what PFA’s largest ever real estate investment tells us about its real estate investment strategy.

Bruhn: spearheading PFA’s real estate expansion.

1 Bigger is better

The $1 billion portfolio acquisition is the largest single investment for PFA Real Estate to date.

The purchase of the 2.7 million square foot primarily residential portfolio was made all cash at a yield around 3.5-3.75 percent, a source familiar with the deal told PERE.

Following the record deal, PFA’s real estate allocation, including unrealized commitments, have touched DKr67.1 billion, an increase of 24 percent since the end of 2017. The allocation is roughly split evenly between domestic and international markets.

2 To PFA, risk is attractive – and a necessity

The portfolio includes 3,700 fully leased residential units with a steady cashflow. In addition, as Michael Bruhn, PFA’s head of real estate, stated in the press release announcing the deal, the portfolio also includes around 538,000 square feet of development opportunities in strategic locations that are expected to contribute “positively to returns”.

This is not PFA’s first development project. Indeed, the pension fund has been taking on more riskier investments with a view to diversify its portfolio and enhance returns. In January 2018, PFA announced the acquisition of an old industrial complex in the Danish capital of Copenhagen with plans to partly demolish it and build office and residential units, even without the final approvals from the local authorities in place.

PFA’s pension clients are increasingly turning away from its standardized average interest products with a steady, guaranteed return. Instead, they are seeking market interest products with various risk and return profiles, according to Danish reports.

According to PFA’s 2017 annual report published in February, the fund’s overall real estate investments generated net returns of 8 percent, up from the 5.4 percent net returns recorded in 2016.

3 Going direct

The German portfolio acquisition is the latest example reflecting PFA’s push to expand its direct investment strategy in international markets. This push stems from a mix of the desire to write bigger cheques, getting increased control of investments, and cutting costs for asset managers.

”The investment is one of the most significant investments to date and is in line with the focus on direct and mega-trend driven real estate investments,” noted Bruhn. “It provides a unique exposure to both residential and commercial use in the growing real estate market in the leading economy in Europe.”

Another recent example of a direct deal was in April when PFA took a 45 percent stake in the £580 million ($747 million; €645 million) acquisition of Devonshire Square, a 620,000 square foot office complex in City of London. 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.

PFA’s direct investment strategy follows a history of the investor indirectly investing via funds. In early 2016 for instance, PFA committed around $150 million and $200 million in Morgan Stanley Real Estate Investing’s maiden core property fund in Asia.

4 Betting on demographics

Around two thirds of the portfolio’s 3,700 residential units are in major German cities with growing population trajectories, such as Berlin, Munich, and Hamburg. This aligns with PFA’s strategy of pursuing multifamily residential deals in markets with favorable demographics, one of the mega-trend driven investments Bruhn referred to.

Another mega-trend – the growth of e-commerce – prompted PFA to partner with the Canadian investor Ivanhoe Cambridge to invest in the pan-Asia logistics operator LOGOS’s third China venture in 2017.