Swedish pension AP2 to double Asia-Pacific real estate allocation – Exclusive

The Swedish pension fund is open to pursuing co-investments and club deals as it increases its exposure in Asia-Pacific.

Andra AP-fonden (AP2), the SKr367.4 billion ($39.1 billion; €34.6 billion) Swedish pension fund, is doubling down its Asia-Pacific real estate exposure.

Helena Olin, head of real assets at AP2, told PERE that it was looking to allocate 10 percent of its total real estate portfolio to the region over the coming years, up from 5 percent currently.

Over time, the pension fund will also look to do more co-investment partnerships or club deals.

“We think that is where a lot of the growth is going to be, so that is why we are there, and that is the long-term view,” Olin said, referring to investments in Asia-Pacific.

In 2018, SKr33.48 billion or 10 percent of AP2’s portfolio – worth SKr334.8 billion at the time – was invested real estate. Within this, five percent was committed in Asia, 30 percent in the US, 10 percent in Europe and the rest in Sweden.

The Swedish investor has so far had only one real estate manager partnership in Asia. It has invested in three of Hong Kong-headquartered Gaw Capital Partners’ flagship opportunistic funds: the 2012-vintage, $1.03 billion Gateway Real Estate Fund IV; the 2015-vintage, $1.3 billion Gateway Real Estate Fund V; and the 2018-vintage, $2.2 billion Gateway Real Estate Fund VI.

In 2018, AP2 also set up a co-investment side car with Gaw, alongside its investment in Gateway Real Estate Fund VI. So far, it has made three investments – in Hong Kong, mainland China and Japan – via this side car.

The 2018 annual report published by the pension fund stated: “The side investments provide opportunities for increased ownership in investments carried out in the Asian markets which are considered to be particularly interesting both from the return and diversification point of view.”

Olin said the investor had traditionally made opportunistic investments in Asia, which have generated returns in the mid-teens. She added that the firm would also explore opportunities in “more stabilised and long-term assets” in the region.

In terms of preferred sectors, Olin told PERE that the pension fund was trying to follow global investment trends. AP2 has made investments in co-working and logistics in Asia and is exploring investment opportunities in prop-tech, data centres and multi-family sectors in China.

“We invested in data centres through the funds and have discussed whether we should do more co-investments,” said Olin.

However, she pointed out that investments in real estate alternatives required more operational skills and a lot of trust in the management, and that this sometimes made them more like private equity transactions than property deals.

At the end of 2018, the Swedish government announced new investment rules for the AP funds. According to the annual report, the changes allowed the funds to invest more in different types of unlisted assets in order to “compensate for a lower expected return on certain listed assets”.

For AP2, its portfolio reported a negative return of -1.3 percent in 2018 due to the poor performance of equity assets globally. However, the report said the decline was “offset by a good return on, among other things, private equity investments, real estate and Chinese government bonds”. The pension fund’s overall return from real estate investments was 19.2 percent in 2018, and 14.7 percent including currency hedging.