Denmark's pension fund giant banks on real estate for growth

COPENHAGEN • The largest commercial pension fund in Denmark is making a big bet on real estate as it adjusts its portfolio in anticipation of very low interest rates for a very long time.

Mr Michael Bruhn, head of real estate at PFA in Copenhagen, just spent more than US$1 billion (S$1.4 billion) on property in Germany as he adds to a real estate portfolio that is worth over US$9 billion.

It was PFA's biggest property purchase to date and follows a recent decision to "significantly increase" exposure to that market through 2022. Mr Bruhn said that is roughly the time frame over which the fund is anticipating interest rates will stay about where they are now.

Based in Denmark, PFA operates in a corner of the world that has had negative rates longer than any other country. The Danish central bank first cut its main rate below zero in mid-2012. Back then, the extreme policy was deployed to fight back speculators hoarding kroner during Europe's debt crisis.

But negative rates have proven hard to exit and Danske Bank now warns that the latest wave of uncertainty in Italy and Turkey is likely to keep Danish rates low as money heads for the safest markets.

For investors, that means that the return to more normal market conditions might be further away than they had perhaps hoped. Mr Bruhn said PFA is now keen to expand its investments outside Denmark in an effort to generate higher returns.

"One-third of the PFA balance sheet doesn't produce any interest or any returns," he said by phone. That includes Danish and German bonds. "They're just sitting there. So we're constantly seeking new ways to find income and, of course, balance it with the risk as well."

PFA decided to invest in commercial and residential properties in Germany even after that market's significant appreciation in value in recent years. "It's not cheap to buy German residential," Mr Bruhn said. "It would have been better buying these assets 10 years ago... but it is what it is." Property was the asset class that performed best in PFA's first quarter, with a return of 1.5 per cent, its latest figures show. Its portfolio of listed shares fell 2.9 per cent in the period and its bond holdings delivered a 0.4 per cent loss.

Investing in Denmark's most liquid market - its roughly US$420 billion in mortgage-backed covered bonds - entails in many cases paying borrowers. The interest rate on loans that are refinanced each year was minus 0.13 per cent, in auctions now under way at Nykredit.

Investing in bonds made good sense before the financial crisis, but not any more, said Mr Bruhn. He pointed out that the spread between returns from what he called "core German residential" investments and 10-year government securities is as high as 250 basis points.

"That's historically big," he said. He added that even if interest rates do go up, real estate offers a hedge because rents tend to rise in monetary tightening cycles.

PFA is also looking at Asia to find higher returns. "We are doing opportunistic investments in China," Mr Bruhn said. "It's the second biggest economy in the world. It has one of the highest growth rates. There are opportunities if you have the value-add or opportunistic style money, so I think it would be a mistake for us not to invest in China."

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A version of this article appeared in the print edition of The Straits Times on August 21, 2018, with the headline Denmark's pension fund giant banks on real estate for growth. Subscribe