APG: Asia is main target for Dutch manager’s rising firepower

Recent investments in China, the Philippines and Australia, plus a big chunk of UK retail, mean APG’s client ABP is on target to up its property exposure by around €2bn, reports Lauren Parr

When your main client is one of the world’s three largest pension funds, you potentially have a lot of firepower and clout. Dutch pension fund asset manager APG has €266bn of assets under management,  more than €20bn of it invested in property. Most of those assets belong to its biggest client, ABP, which in turn has €231bn of total assets.

There was a frisson of excitement at the start of 2010 when ABP outlined its target to increase its property allocation by 1%, as part of a three-year plan to take its real estate weighting from about 8% to around 9%. For this giant, 1% represents a potential investment requirement of €2.3bn. “Generally, we are looking to increase allocations towards real estate,” says Robert-Jan Foortse, APG’s head of European non-listed property. “This is a moving target; it depends on the amount of assets we have under management. It’s not set in stone, but €2bn is the figure we are working off.”

Unlike most other large institutions (apart from its Dutch peers) APG has invested purely in indirect property since the mid 1990s, with a 70% listed and 30% non-listed split. “We always look for an operational partner and will not hold investments on our balance sheet,” Foortse says. Judging a debate on listed versus unlisted property at the ULI Europe conference in Paris this month, APG head of real estate Patrick Kanters, Foortse’s boss, supported both: “Non-listed allows for more control and more alignment and is a much bigger universe. Listed offers liquidity and is the optimum way to attract new capital.”

APG has identified Asia Pacific, including Australia, as its main target, based on strong economic growth, and has an eight-strong team in Hong Kong – led by Daan van  Aert, head of strategic real estate for Asia – through which to source deals. Three members of the business focus specifically on listed real estate securities. So far this year, all APG’s real estate deals have taken place in Asia. It backed a Chinese development fund called the Harmony China Real Estate Fund, quickly followed by a €37.4m investment in private Filipino residential developer Century Properties.

Investment drive in Asia

The current geographic split of the portfolio is 39% in the US, 39% in Europe and 22% in Asia Pacific (see pie chart opposite), but APG aims to increase the Asian weighting. Foortse says: “On a global scale, our preference is Asia Pacific. We are still slightly below weight in that region. In effect, we have reached our target allocation for Europe, but we see some selective opportunities and still have an appetite for good transactions.”

About 80% of APG’s Asian real estate investment is allocated to developed markets including Japan, Australia, Hong Kong, Singapore and Korea. But in a bid to capitalise on the region’s economic growth it will focus on residential investment in less developed markets. Foortse says the best sector to focus on, for instance in China, is housing, because of the emerging middle class. However, other markets can prove difficult to manoeuvre in.

“Typically, when we look for core exposure we are interested in retail or logistics. But it’s very hard to find core exposure in some Asian countries; I’m not sure whether retail in China would be considered core.” Further investments in Japan are unlikely, though, owing to the economic climate and relatively low property yields there. Foortse adds: “On the non-listed side it can be tough to find the right partners, strategies and portfolios, sometimes because the markets aren’t mature enough and in other cases because capital isn’t scarce, so in a sense they don’t need our money.”

APG is invested in Jeff Schwartz’s company, Global Logistics Properties, the largest industrial logistics firm in Asia. In Australia, APG has invested in Valad’s Australian V-Plus Fund and others sponsored by listed companies like GPT and Mirvac. It has also joined a club of large investors led by industrial specialist Goodman, including Canada Pension Plan Investment Board and China Investment Corporation, that in December bid to take ING REIM’s Australian listed ING Industrial Fund private.

APG enters indirect deals through funds, joint-venture partnerships and club structures, the latter more frequently, since club deals are popular in the current market. “It’s a strategy we like because it is more straightforward to have a limited number of people around the table,” says Foortse. “If there are no small investors in the market, by definition you end up in a club deal.”

APG doesn’t exclude investment via funds, however, as is evident from its participation in last autumn’s equity raising by the Goodman European Logistics Fund. APG’s pipeline of investments could include a further contribution to Pramerica’s European debt fund. “Pramerica has made its first investment, so there is still plenty of money to invest,” Foortse says. “We’ll see how that goes. There is a possibility we will increase our commitment.”

Mezzanine debt on the menu

APG’s rationale for investing in debt stems from its conviction that there is demand for mezzanine finance for property. Mezzanine debt presents a chance to generate “equity returns with a debt-risk profile”, Foortse believes. This sets the group apart from many of its peers, who remain uncertain about where debt fits into their portfolios.

“Even for us, it’s a different animal within our model; typically, we are equity providers,” Foortse says. “Smaller pension investors will not necessarily go to the headache of deciding whether to classify it as fixed income or property.” Given that dilemma, APG views debt as ‘property’ material.

The group is also sifting through potential opportunities that may result from the cloud of debt hanging over the market over the next few years, such as recapitalising certain companies or strategies. As for other European strategies, APG is seeking prime retail exposure and last year invested almost a third of its €2bn-plus target in two large joint-venture deals.

Assets don’t get more ‘prime’ than the Westfield shopping centre development in Stratford, east London, in which it invested £435m last November, in an £870m joint venture with The Canada Pension Plan Investment Board (CPPIB), with whom it has a long standing relationship.

APG was attracted to the deal because it wants to increase its prime retail exposure  in mature western European countries. “That was the focus for us,” says Foortse. “We made an acquisition in Nice, France, in the first part of 2010, and now this.” To buy Nice’s Cap 3000 mall, through a vehicle called AltaBlue, APG teamed up with shopping centre developer Altarea and Crédit Agricole Assurances’ subsidiary Predica, to pay €450m in May. APG put up  €200m of equity, as did Predica, with a bank loan making up the difference.

The listed team also upped APG’s European retail exposure last year through buying about one third of €600m of equity raised by Corio to acquire more than €1.3bn worth of retail assets in Germany, Portugal and Spain from Multi Corporation, maintaining its roughly one third stake. APG is also likely to commit about £75m of the £250m target for retail specialist Pradera’s latest, unlisted, retail park fund. APG’s European investments are made via the group’s Amsterdam office, where Foortse is based.

Needless to say, the portfolio didn’t escape the downturn: in 2009, APG’s opposition caused ProLogis European Properties (PEPR) to abort attempts to change the company’s structure to allow the logistics specialist to raise equity at a discount to net asset value. PEPR had a €1.6bn mountain  of imminently maturing debt when the crisis hit and suspended the dividend. It has since successfully restructured. US, deals, meanwhile, are done through APG’s business in New York, while the Hong Kong office opened in 2007.

Banking on retail returns

Retail dominates APG’s portfolio by sector (see pie chart below) and is favoured for its long-term risk and return characteristics. But APG is open to selective office investments and would like to diversify its residential exposure from the Netherlands to markets like the UK, France, Germany and Sweden. Foortse can also envisage a marginal rise  in its allocation to hotels.

APG plans to expand its non-listed US portfolio this year, mainly in core sectors such as retail, multi-family housing and potentially industrial. Also on the agenda  is more exposure to Brazil, where strong economic conditions provide a compelling growth story. But it plans to maintain its current overall exposure to the Americas.

“In the US we have invested primarily in somewhat more opportunistic funds,” says Foortse. “We want a bigger listed sector core exposure, combined with more opportunistic exposure to the non-listed sector.” Now one year in to its strategic three-year plan, APG is keen to buy property sooner rather than later. But, Foortse says, “[ABP’s] allocation doesn’t have to be deployed right away. The money is available if and when we see the right opportunities.”

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