There was a time when the story in European real estate was the influx of US institutional investors into the region. However, while that story still continues, today the capital is flowing in both directions and European LPs are increasingly setting their sites on the US market.
For example, ATP, the large Danish pension fund, recently made a strategic decision to invest in North America for the first time, hiring The Townsend Group to advise it on the most appropriate US funds for investment. Michael Nielsen, managing director of ATP Real Estate, says the pension fund is aiming to put 40 percent of its real estate allocation into the US.
“No doubt we see [club deals] as the preferred way to go. But if you do not have the fund manager to do a club deal, you have no club.”
Not only is this a significant step for ATP, it's also a new trend among European LPs overall, according to Nielsen. And the reason they are doing so is the same reason they began investing outside their domestic markets a few years back: diversification.
Many European pension funds began investing indirectly in real estate around 2002 as their allocations to real estate increased and their domestic property markets proved too limiting. However, given that they did not have the extra manpower required to invest in foreign markets, they looked towards indirect vehicles instead.
Now that investing across Europe has become a well-worn path for many institutions, going to the US is a natural extension. “The business case is exactly the same as in Europe,” says Nielsen. “You can get diversification. Economic cycles in general are not running the same in the US as they are in Europe. And for us it is a question of getting access to a large market.”
The movement of European capital to the US, however, underscores a more fundamental point. European LPs are not just investing in America, they are increasingly behaving like their American counterparts as well.
Just as US LPs have branched into the global markets, so too are European institutions. And at the same time, they are demanding transparency from the funds they invest in. In the US, transparency on issues such as fees is taken for granted, but in Europe the topic is only just now being addressed. In the past few months, INREV, the trade body for unlisted European real estate funds, produced guidelines on reporting standards. Next up, INREV is looking to tackle transparency in fees as well.
Not only are European LPs now able to push harder on those types of issues, they are also pushing the boundaries in terms of their investment strategies. Rather than purely acquiesce to the fees that fund managers foist upon them, they are increasingly entering into club deals as well, forming joint ventures with GPs instead of merely setting up a discretionary fund. For example, earlier this year, the Dutch pension fund ABP teamed up with ATP and German property manager Patrizia to invest in Germany.
“We have seen a trend over the last year or so where the market for club investments has increased,” says Nielsen. “The business model is to identify, hopefully, the best manager in a market and set up with him and one or two other like-minded investors.”
The benefit to investors is clear: they can get a lot more influence on the strategy, the fees levied and the structure of incentive packages. “No doubt we see that as the preferred way to go,” says Nielsen. “But if you do not have the fund manager to do a club deal, you have no club.”
For the moment, however, it seems that indirect investment will continue to be an important part of any European LP's strategy. ATP's current investment program, for example, has committed €800 million ($1 billion) to various funds and has another €800 million remaining.
But figures like this are sure to be dwarfed by the latest arrival on the scene. Earlier this year, the Norwegian Government Pension Fund, which was set up to invest Norway's vast oil revenues, made a proposal to the government in order to begin investing in real estate. Observers say that its strategy is bound to involve an indirect global strategy. On the back of soaring oil revenues, the fund is worth around $300 billion.
“I am sure they would do it in a careful way and they will definitely be a big player. We look forward to seeing what their plans are going to be,” says Nielsen.