EUROPE NEWS: Danish treat

Last month, Unipension announced the decision to sell its direct domestic property holdings in favor of diversifying into international real estate. Specifically, the Danish pension fund administrator was looking towards European and US assets, potentially through unlisted funds.

“The trustee boards have adopted a new, common property strategy to ensure higher long-term returns and better risk diversification than today,” Unipension stated. “This means that the current property portfolio is or will be put up for sale in early 2013.”

On the surface, the move seems a positive one for private equity real estate. After all, much of the news emanating from European institutional investors of late has tended to show a desire for less traditional fund investing. Therefore, news that a large pension fund wishes to put some of its capital to work in international funds was celebrated.

Comprised of three pension plans, Unipension manages a total of DKK100 billion (€13.4 billion; $17. 4 billion) on behalf of architects; academics employed mainly in the public sector at universities and upper secondary schools; and agricultural academics and veterinary surgeons. In all, it looks after around 100,000 members with something like 80 staff working at the administration service.

Following the sale of its domestic property, the Architects’ Pension Fund and the academics-focused MP Pension should end up with an allocation to real estate of 5 percent, down from 11 percent and 6 percent, respectively. Meanwhile, the allocation for the Pension Fund for Agricultural Academics and Veterinary Surgeons (PJD) would rise from 1 percent to around 5 percent.

For its new real estate strategy, Unipension essentially is introducing the same approach that already has been successfully implemented on behalf of its stock and bond investments. “Until now, the pension funds have owned Danish residential and commercial properties, which does not provide an adequate spread of investment risk,” the administrator explained. “Therefore, the future property portfolio will be worldwide, based in Europe and the United States.”

Certainly, the news has made waves in Danish property circles. One Copenhagen-based real estate professional said: “It is the first time in the last 24 years that I have seen a Danish pension fund make this kind of decision in this way.” Others have done similar things on a smaller scale, but it is the first time that a major pension has taken such a “radical decision,” he added.

Still, after Finland, Denmark is commonly regarded as the most active county in the Nordics in terms of diversifying into international property. This is sometimes explained by legislation that prevents neighbouring countries from investing in such a way. Norwegian pension funds, for example, have restrictions placed upon them with regards to leverage. In Denmark, there is no such impediment to investing overseas.

Indeed, there is some evidence that more Danish investors might follow Unipension. A Nordic-based advisor who did not wish to be named said he was aware of another Danish institutional investor of size that had plans to expand internationally.

Asked whether this was a sign that Danish institutional investors and those from the Nordics generally were opening up further to international property funds, the advisor offered an example of a prime Swedish institution that had taken the decision to do the exact opposite. Indeed, that investor is selling its fund investments in order to go direct as part of its ‘interpretation’ of Solvency II, the European directive requiring insurance companies to hold capital matching 49 percent of their real estate equity investments.

There is another aspect to Unipension’s move, in that some of its members rent properties that are held by the pensions for investment purposes. That in itself can rise to “a kind of conflict,” as one person with knowledge of the institution put it. He was more or less making the point that Unipension might be deciding to ditch its domestic portfolio as a secondary consideration to the main one – higher returns and diversification. Several years ago, the doctors’ pension executed a similar strategy for similar reasons, he suggested.

“Property historically did have too much attention in the pension funds,” said the source. “There are serious conflicts of interest, meaning that the members expect to have service and quality in the apartments they are renting because they feel they own the building indirectly through their pension fund. If you look at it from the investment department’s perspective, you have a conflict because the members might not think the right decisions are being taken.”

Still, there are not many that suggest a new wave of capital will flow out of the Nordics. “In general, interest in funds with international exposure from the Nordics has not been that great, though clearly there have been some large ones that have built up their own resources internally, giving them the means to do that,” the professional said.