Sweetheart pension fund pair plan to boost joint real estate unit

A new strategy for the closely-cooperating pension funds Dip and Jøp is to boost their real estate investments. The plan is to be put into action as soon as possible, with DKK 6 billion (EUR 800 million) earmarked for new property investments in Denmark, CIO Mikkel Svenstrup tells AMWatch's sister site EjendomsWatch.
"We're pleased with the strategy of taking bigger bites than previously," says Mikkel Svenstrup, CIO at pension funds Dip and Jøp.
"We're pleased with the strategy of taking bigger bites than previously," says Mikkel Svenstrup, CIO at pension funds Dip and Jøp.

More real estate; more investments, and perhaps ­ project development.

The two Danish sweetheart pension funds Dip and Jøp have agreed to merge and boost their real estate investments very soon, according to Mikkel Svenstrup, the CIO of both funds.

"We're open for business, and we would like to get closer to the market, and this is our way of doing so," Svenstrup tells AMWatch's sister site EjendomsWatch in an interview.

The value of the pension funds' joint real estate portfolio is DKK 12 billion (EUR 1.6 billion), which corresponds to 10 percent of their total assets. In future, real estate investments will account for 15 percent of the overall portfolio, rising by around DKK 6 billion to DKK 18 billion, the CIO says.

When EjendomsWatch asked him at which point he expects to reach the target, he said: "In principle, as soon as possible – if we find the right properties at fair prices."

At the end of 2017, the board adopted a risk-based investment strategy which will be implemented in 2018. The share of real estate will be lifted at both funds, which have gained most of their returns from equities.

In 2017, Dip posted a return on all investments before tax of 9.4 percent, including 9.7 percent on real estate alone. Jøp reported a total return of 9.1 percent, with real estate generating 10.8 percent.

Stronger team

In order to reach the target, the pension funds plan to hire more staff to the real estate unit, says Svenstrup.

At the moment, there is one employee working on real estate investments in Denmark. With the new strategy in place, more staff will be hired.

"Of course, we will hire more staff for the real estate unit in Denmark, as our ambition is to grow in this area. Everything is very expensive right now. Equities are expensive. Credit bonds are expensive. Real estate is expensive. However, it is still less expensive than other assets," he says.

Commercial real estate

Previously, Dip and Jøp had a larger share of rental property in their portfolio and less commercial property. However, about a year ago, they spent DKK 860 million buying all the equity of one of Thylander Gruppen's funds and bought three commercial properties. In September, they bought Telenor's office building in Copenhagen with an official valuation of about DKK 150 million.

"We want to increase our activities in commercial property. Not double them, but increase them," says Svenstrup.

The funds began co-investing in 2013 and they are not frontrunners in the real estate market.

Like other pension funds Jøp's and Dip's assets have grown in recent years, and the interest rate has dropped. The hunt for returns makes the funds boost their real estate investments.

Other pension funds in Denmark have increased their real estate investments in recent years. With all that extra money in the market, the question is: How much are they ready to pay to become a player? They are ready to say no to expensive and risk-based real estate, Svenstrup says.

"We're growing just like the other funds, and we'd like to buy more property, but we will not be not growing by 10 percent every year. We will increase our activities, but the risk premium must still be viable.

In order to get the right portfolio mix, Svenstrup has made minor adjustments of the real estate portfolio. Small properties have been sold, and big ones have been acquired.

"We're pleased with the strategy of taking bigger bites than before," he says.

Closer to the market

The Danish pension fund PFA has begun to opt out of funds and make direct investments in real estate. In a heated market of low returns, it is more cost-effective to avoid paying fees to the funds. This approach is part of Dip and Jøp's strategy too:

"In increasing our resources and getting closer to the market, we're going to handle it ourselves. There are things that the funds take care of, but a project such as Telenor, we'll handle ourselves," says Svenstrup.

At the moment, 56 percent of the investments are made in real estate directly and 44 percent indirectly. Svenstrup is reluctant to say what the future ratio will be.

Although the interest in direct investments has increased, it relies on the risk/reward ratio.

Search for new ground

Up until now, the pension funds have not engaged in property development projects.

Dip and Jøp's properties have been developed, but the management has not engaged in construction like other pension funds.

"This is an area we'd like to explore. We're reluctant to engage in development projects, as there is no room for errors in this market," says Svenstrup.

Dip and Jøp want to get closer to the market and build up more experience, he says, adding that perhaps at that point, the funds would consider development projects.

"Our concern is risk. Even if our assets are growing and we're ready to make more investments, we still want to be prudent," says Svenstrup:

"We've previously said no to offers. We've also made unsuccessful offers. We will still consider price and reward, and we will not take unnecessary risks," he says.

English Edit: Lisa Castey Hall Nielsen

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