CASE STUDY

European Real Estate

Pension Fund, The Netherlands | 2018

Engagement at a glance

A Dutch pension plan sought to make their first investment in international real estate. This investor was ideally hoping for core-type exposure but were happy to consider income-producing Core+ strategies for a target return of 6-9% per annum.






 

Client-specific Concerns

This pension fund was looking for diversification across European geographies and property types, with relatively low exposure to the Netherlands. Only Open End diversified funds were to be considered, and there was a preference for relatively low (sub-35%) leverage, limitations on development and a strong ESG focus. Although looking for exposure to ‘Europe’, the investor was prepared to consider Eurozone only funds as well as those investing across Western Europe. 

Outcome

  • There is a growing range of pan-European Open End Funds: 18 were considered for this search, double the number that were available three years ago. Although their average size is considerably smaller than the equivalent funds in the US (NCREIF set of ODCE Funds), a substantial group now have more than €1bn in NAV, and three are around the €5bn mark. These increases reflect the dramatic growth in the scale of the market, which has quadrupled in size during the last three years.

  • Although the investor broadly preferred larger funds in principle, they were concerned to understand exactly how managers – and particularly who had experienced a surge in fundraising – had deployed capital. Style drift was a key issue, including a shift towards more risky (higher yielding) markets such as Italy and the question of appropriate exposure to Logistics and Retail assets. The final stage included site visits with the investor in order to gain deeper a deeper understanding of the manager’s value creation and risk management at the asset level.

  • The launch of a series of new funds has led to considerable turnover of senior staff and portfolio managers, and some of these new funds have received capital from highly concentrated – often balance sheet – sources. These qualitative issues are particularly important in manager selection right now. Meanwhile, systematic analysis of the strategy, track record and pipeline also highlighted the significant differences between the relevant managers.

  • Analysis of ESG credentials included a review of performance relative to GRESB and highlighted steps being taken by many of the managers to reinforce credibility in this area.

Our specialist says

  • The growth of the pan-European Open Ended real estate fund market since the GFC has been a very positive development for investors, providing access to a set of assets diversified by property type and geography. Yet they tend to be smaller and at a considerably earlier stage of development than their US counterparts (ODCE index). The highly varied and dynamic nature of the universe, including considerable organisational change, means great care needs to be taken when considering investment in such funds.

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