Returns between 10 and 15 percent. These are the kind of returns that Danish pension fund Pensam makes on real estate investments these days.

Ten years ago, the same type of investments generated returns of around five percent. Pensam has achieved this increased rate of return by entering the real estate value chain at an earlier stage.

"Back in the old days, pension funds exclusively made investments based on return requirements. We did the same thing at Pensam 10 years ago when I started out there. The motto was to make five percent in returns in Copenhagen real estate, and we didn't look at the price at all. We don't invest that way today," explains Pensam's head of investments, Benny Buchardt.

During the financial recession, certain opportunities and ideas arose as to why it was so hard for developers to build anything now that it was so cheap. We could not make it work, so we began to show interest in the possibilities down throughout the value chain in real estate investments.

What they learned at Pensam was that it made no sense to get in the back of the line in the chain of development within real estate construction. The idea of getting in the very back and accepting returns of five percent without having investigated at all whether or not you can make money other places along the way became a less appealing idea.

Pensam's real estate investments constitute around DKK 8 billion (EUR 1.1 billion) of the DKK 130 billion in total assets under management.

Not only bakers can bake cakes

"We wanted to buy some land. We wanted someone to a design a project and we wanted someone to build it. And then we wanted to either rent it out or sell it. That's the value chain. If you want to buy when it's complete and already rented out, then you'll have the least amount of risk, but you'll also be stuck with the lowest returns of around five percent excluding certain costs and other expenses," says Buchardt, who has already won awards from institutions including IPE (Investment & Pensions Europe) for being the real estate investor of the year in the Nordics.

Buchardt grew frustrated with the fact that developers without money could take a project and complete it thanks to buyer-commitments from pension funds.

"In that way, it was the pension funds' money used to buy the land, but we didn't get the surplus returns generated along the way in the value chain," Buchardt explains, adding: "The only thing we really needed was a partner to help us be investors in the other parts of the value chain."

That is how the idea came about that cakes can be baked without letting bakers do it. Anyone can go buy the ingredients, find a recipe, and bake the cake for a lot less money.

Pensam wanted to buy the land, and also hire someone to design the project. And the pension fund furthermore wanted to handle the sale or renting of the final product, while avoiding managing the actual construction process.

"We have demands with regard to quality. But we don't want to be at the construction site stacking bricks and measuring if things are level. Simply because we won't complete the process fast enough if we handle the construction ourselves," says Buchardt.

Positive commitments from partners

For this reason, Pensam opted for a strategy to always build alongside a partner. The partner would partly be in charge of the construction management, but also be a partner to put up money and make targeted investments together with Pensam, although Pensam would always own the majority stake of the projects.

"In the value chain, it's important to get a partner where both parties always generate the same returns. Our partners are aware that costs need to be fair, but that it shouldn't be at the expense of build quality. If quality goes down, then you'll have a lot of problems afterwards. As a pension fund, we are extremely focused on good build quality. We can't have a reputation of being sloppy," Buchardt tells FWAM, referring to the importance of having partners involved in the real estate investments.

But all things being equal, does it not entail greater risk to go buy land yourself, find the right parties to design the project, and find the right partner from the developer industry, risking that everything crashes and burns, potentially triggering a loss for Pensam's 400,000 customers?

"That's true. It entails greater risk. But you have to take on risk in order to make money these days. That's how it is. Yet you should remember that we also reduce expenses at the same time. We get things cheaper. And that provides a buffer for the risk," says Buchardt.

Furthermore, you always have to weigh the risks within real estate investments before embarking on them. The investments must be able to withstand a worst-case scenario where the market crashes and declines by 30 percent, Buchardt emphasizes.

"Usually we build to sell. But if we can't sell, then we can rent with a certain occupancy. We build at a 100 target price with the intention of selling at a 130 target. So if the market collapses and we can only get a target price of 100 in a sale, the property can be rented out so that we end up with the five percent which is what we wanted if we had purchased a finished product like in the old days," concludes Buchardt.

English Edit: Gretchen Deverell Pedersen