The folks at UBS’ global real estate team were rightly celebrating a coup last month. Germany’s biggest pension fund, Bayerische Versorgungskammer (BVK), selected the firm ahead of a slew of eager rivals for a €500 million international multi-manager account.
Kudos to UBS for that, and hats off to Tilman Hickl, who heads the UBS Global Real Estate business in Germany, for spearheading negotiations with Munich-based BVK, which is state-owned and looks after 12 pension funds for professionals such lawyers, doctors, architects and engineers. Indeed, it seems that this is one of the largest – if not, the largest – fund of funds mandates to be awarded in Europe this year.
Having caught up with UBS in Frankfurt on the day of the announcement, there obviously was much internal excitement. It was particularly sweet for the team to be able to announce the mandate one day before the firm held its Investor Day on November 17.
Enough about UBS, though. What about BVK? From that perspective, there are perhaps five key points to make about the announcement:
1. BVK let it be known that it had awarded this mandate in the first place. In the still secretive world of private equity real estate commitments, it is fairly uncommon in Europe for the identity of the investor to be revealed. Indeed, BVK didn’t make its four previous international real estate fund managers public. The reason for the exception on this occasion was a practical one.
Daniel Just, BVK’s deputy chairman and head of asset management, confided to PERE that the pension fund felt that going public with the mandate would help UBS open doors when it came to executing on its mandate, which is to select managers in core, value-added, opportunistic, niche real estate and BRIC countries. Now, UBS can go about its task with the extra confidence that publicity can give it and in the knowledge that BVK is not touchy on the usually ‘confidential nature’ of these things. For private equity real estate managers, this is an open message to the world over saying, ‘BVK wants you.’
2. Why does Germany’s largest pension fund, with around €53 billion of assets (including €6.36 billion in real estate), need an international fund manager? After all, BVK has been investing in international real estate for more than 10 years. In fact, 50 percent of its portfolio is outside Germany.
The answer is reassuring to the private equity real estate trade. While BVK manages its Germany assets in-house, it doesn’t yet feel that it possesses the requisite manpower and skills internationally, upon which it places a premium on physical presence.
3. If BVK already has international real estate managers, why the need for a fund of funds? Just explained that, if one looked at the established markets, one can see prices rising, so core real estate may not be the best opportunity at the moment. Instead, BVK is looking for value in niche markets, such as car parks and hotels, as well as opportunistic and value-added strategies and investments in Brazil, Russia, India and China. To date, the pension hasn’t invested in these strategies. The fund of funds mandate with UBS will give it better diversification, as well access and management of assets in these areas, he noted.
4. What does this say, if anything, about German pension funds in general? “At the moment, because of expectation of long-term inflation rising, I think the majority are hunting for real estate,” Just said. “This is a tendency, and everybody is going international. All pension schemes need diversification.”
The UBS mandate validates that the German market has great potential because there are many players like BVK that still are lacking enough international property exposure. These pension funds have not been able to increase their allocations due to regulations, but UBS (and other providers) have found a way to structure the portfolios in a manner that fits their real estate quotas.
5. BVK is playing its part in discrediting one of the most overplayed ‘truisms’ in European real estate. That being Germany is a ‘boring’ real estate market. In fact, the market is changing into something quite radical and opportunistic.
BVK itself demonstrated this when it recently won a competition to provide a real estate loan to a club of investors led by IVG Immobilien, which were buying the 36-story Silver Tower in Frankfurt am Main from Commerzbank. Indeed, a German pension plan providing a 10-year loan to a club to buy a trophy asset is highly unusual. Allianz, a major German and international insurance firm, also wanted to provide that loan. In the end, the pension fund won it, not a traditional real estate lender.
Things are changing in Germany. Allianz is considering opportunistic investing in its own back yard and is entering into new markets such as Poland to find value. IVG, mentioned above in connection with the Silver Tower, has a goal of complementing its vast product portfolio with a ‘REPE’ fund. At the same time, new firms are at varying stages of deploying capital in opportunistic fashion or advising investors on doing so, including Optimum Asset Management and Albulus Advisors.
With outside investors looking into Germany for opportunistic strategies and domestic investors looking outside the country for such strategies, Germany should lose its ‘boring’ tag pretty fast. BVK should be acknowledged for its role in making that happen.