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Position paper 14 December 2017

What MN wants

In 2014, the Dutch pension manager altered its investment strategy profoundly impacting how it positions real estate in the portfolio today.

This article by Jonathan Brasse appeared on the website of Pere, a leading publication for the world's private real estate markets.

Private real estate investment managers will be interested to know that MN, the Dutch pension fund administrator formerly known as MN Services, plans to increase its private real estate assets by 60 percent within the next four to six years.

Growth direct and non-listed real estate
The pension administration and investment organization, which represents approximately 2 million people, many of whom are members of the metal industry pension schemes PMT and PME, aims to grow its direct and non-listed real estate portfolio from €5.3 billion currently to about €8.5 billion between 2020 and 2022. That would reflect a 6.8 percentage allocation to private real estate, on the basis its €125 billion of assets stays consistent.

But here’s the rub: only core managers plying their trade in the Dutch or other European markets need reach out to this particular investor to help it realize its strategy. While MN does currently have American and Asian private real estate investments on its books, many of which are in value-add and opportunistic funds, Jeroen Reijnoudt, its principal responsible for many of them, says the intention is to see them managed through and not to redeploy the proceeds outside the region.

We’ve made our strategic decision about what role real estate should have and that is to have it be part of the lowest risk part of the return portfolio

Jeroen Reijnoudt

“We still have to wind down close to €1billion internationally non-listed positions,” he says. “But that part of the portfolio used to be much bigger – two-and-a-half times the size, in fact.”

The decision to reposition the property portfolio happened in 2014 and was part of a wider strategic plan to redefine what asset classes should offer long-term and stable income. Whereas in the past, property was regarded as a higher risk-return proposition, MN today sees it in a similar vein to fixed-income products – hence the recalibration. “We are seeking for it to have a bond-like status, in the lower risk part of the return portfolio, but with substantial higher returns than fixed income,” Reijnoudt comments.

Swimming against the tide
MN is not alone in reconsidering real estate to perform in a similar way to bonds. But it is increasingly swimming against a tide of institutions today more willing to venture up the risk curve in light of many property markets reaching cyclical pricing peaks. According to Hodes Weill and Cornell University’s 2017 Allocations Monitor, investors generally are favouring alpha-generating strategies over core investing – with 64 percent of European institutions polled in the report saying they favored opportunistic strategies, up from 57 percent last year.

It is also at odds with increasing numbers of investors keen to expand, not retract, their global investment footprints. In the Association for Investments in Non-listed Real Estate Vehicles (INREV) Investment Intentions Survey 2017, 63.4 percent of European investors intended to increase their global portfolios versus only 4.9 percent planning a decrease.

“We’ve made our strategic decision about what role real estate should have and that is to have it be part of the lowest risk part of the return portfolio,” counters Reijnoudt. “It’s not that you can’t be in bonus territory with real estate. We did it quite successfully over the years. But we decided real estate should have another purpose. It should provide income and be a stabilizer for the portfolio. Besides that, we had enough exposure to US dollars in the return portfolio through asset classes like private equity. Also, being in control is extremely important for us, and that’s easier to achieve close to home in European markets that we know through and through”

While MN has determined a blueprint for its property holdings, secondaries investors reading this should also not get too excited about this strategic shift. Reijnoudt says: “We’ve decided we are not selling these assets on the secondaries market because that’s a big number discount market and to do so would simply cost us too much.” By Reijnoudt’s reckoning, the legacy international portfolio of value-add and opportunistic fund positions should have whittled down to almost nothing within two years through natural management.

One area where MN’s approach is chiming with many of its peers, however, is its appetite to invest larger amounts of capital with fewer managers. “We used to have up to 65 funds,” says Reijnoudt. “We’re expecting to have around 15 once we’re done. Not only that, our average management fees will drop to very low levels. We want to invest more with less managers against less costs.”

Strict criteria
In another similarity, MN is shifting to favor single-sector funds over multi-sector vehicles over the next few years with remits spanning the region. In 2016, the investor committed €1 billion to multi-sector pan-European funds including Baring Real Estate Advisers and Deutsche Asset Management’s pan-European core open-ended property funds. This year, it has backed TH Real Estate’s European Cities Fund, an investment Reijnoudt believes typifies MN’s current approach and in 2017, MN will be backing the first Pan European multifamily fund by Standard Life Aberdeen. Each of these vehicles conforms to MN’s strict criteria, relating to areas including leverage levels, sustainability and costs.

Each of these vehicles conforms to MN’s strict criteria, relating to areas including leverage levels, sustainability and costs

Jeroen Reijnoudt

On the latter, Reijnoudt says: “That’s a driver to be a cornerstone investor. Low costs mean we rip out most of the performance fees of a portfolio and focus only on management fees. Our focus is on lower but more stable returns and therefore also a low total expense ratio of below 1 percent.”  That said, development investment is on the proviso MN can own the property afterwards – that could precipitate slightly higher fees, compensated by realized development premiums. “We’re open to conversations to start new sustainable investment products where there are no products available – such as in senior and student housing or in certain residential or logistics markets. Also, we would like to see forms of impact investment or sustainable development goals embedded in the strategies of our managers”

Reijnoudt insists MN’s decision to turn its back on property ex-Europe and ex-core is not a reflection on its performance in the other regions. In fact, the investor’s US investments have been its best performing, returning more than 10 percent a year, while its Asian investments returned slightly less than 10 percent a year. Nor is the decision for a strict focus on Europe set in stone. “That is something that might pop up in the future, when we can’t find or create the right opportunities in Europe anymore.”

But today, the requirement is a return post-fees of 5 percent to 8 percent and that should be possible from a European concentration of property investments.

While managers of value-add and opportunity funds operating outside Europe are not currently conforming to MN’s house view, the ever-evolving nature of real estate market cycles could well mean that before too long, they may once again in the future. They had better check back after 2022.