The Dutchman

ABP Investments, the asset management arm of the pension fund for Dutch civil servants and educators, is one of the most powerful European LPs in private real estate funds. The pension fund began investing in indirect real estate in 1998 and has approximately €17 billion ($19 billion) invested, which is organized under the alternative investments division. It is an investor in a range of managers including Aberdeen Property Investors, Apollo Real Estate, The Carlyle Group, Heitman, ProLogis, Tishman Speyer, Neinver and Vesteda Groep. Here, Patrick Kanters, managing director of real estate, Europe and Asia-Pacific, explains why operators will outperform allocators, his firm's moves into Asia and why fund managers should stick to what they know best.

ABP is one of the biggest investors in real estate in the world. What is the single biggest issue facing you?
The last few years have been very strong when you look at returns across all regions, so the question with the large amount of money still being invested or waiting to be invested is whether fund managers remain focused and cautious on underwriting future deals. It will be a challenge to see if they can achieve the IRRs they promised during their fundraisings. What is important for us over the next few years is which fund managers will be the better ones. Our view is that operators will outperform the allocators. Those that are actually able to extract the value from the property they are buying by really actively managing it, renovating, and so on will most likely outperform the fund allocators.

Given the success of the market, there are a huge number of funds being proposed. does that create problems for you?
There are a lot of proposals, good and bad ones. One issue is that the terms and conditions being proposed by a lot of funds are increasingly in favor of the fund manager. Governance standards are not always helped by there being so much money. Fee schedules might be less favorable for the investor. We remain very keen and strict on terms, but the terms and conditions have changed during the last year and sometimes they become badly aligned with the institutional investor.

Has enough been done to improve this situation?
It has definitely improved a lot, especially on the transparency issues. On alignment of interests, there are still very large differences. It is understandable and tempting to set up new funds, so managers might not want to focus on just a few vehicles. They are operating a few vehicles with overlapping strategies and do not always have dedicated teams for each individual fund. That is a risk that we currently see in the market. The question from our side is which people actually manage the properties. In the more value-added/opportunistic type of investment, the value is really created by a few key members who have the skill set. For the core vehicles, it is often more of a team effort. We strongly prefer it when the key managers are dedicated to the individual fund and do not have to spread themselves across various vehicles. In core funds, it is more of a team effort and we tend to be less concerned.

Is the talent pool deep enough?
There are very good mangers. On the other hand, it's hard to keep the right people on board. In the Asian markets, it is hard to attract well-skilled people. The shortage is biggest in various Asian funds.

You mention Asia. Where is ABP putting its capital?
It is a very interesting question: Which regions will be the out-performers, especially now that it is more challenging to achieve certain returns? Right now we already have some exposure to Asia and the Asia-Pacific region. We see an increasing exposure to that region. That's why we set up a Hong Kong office. We set it up to get closer to the market partly because it is less transparent, but also to show that we take it very seriously. We will recruit more people there.

What are the challenges in Asia?
The non-listed fund business is quite new and that means that governance structures might be somewhat different than what we are used to in Europe and the US, which is a little ahead of Europe. You might have to agree to a corporate governance structure where there are more potential conflicts of interests.

Which areas of Europe do you like?
We like Paris and the provincial cities of France because we are still very bullish on the office rental outlook. The same applies to the Nordic region where several non-listed funds are being launched; that was absent a few years ago. Central Europe retail and residential property is an area in the last few years where we have tried to commit more to opportunistic vehicles.

What is the best proposal a fund manager can put to you?
One in which they try to remain focused on certain sectors or certain regions. We tend not to prefer very broad pan-European funds unless there is added value for building up a pan-European portfolio. In the case of offices, there is not much synergy. But in logistics, it makes a lot of sense because you are serving a fairly limited customer base. I would also advise managers to try not to launch funds that might be conflicting or might have overlapping strategies. Don't try to be good at everything.