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Denmark’s US$450b pension market is piling Into real estate

Funds in the world's top-ranked pension industry are responding to negative interest rates by buying up increasingly large stocks of real estate to safeguard returns.

[COPENHAGEN] Funds in the world's top-ranked pension industry are responding to negative interest rates by buying up increasingly large stocks of real estate to safeguard returns.

Of the eight biggest Danish pension funds contacted by Bloomberg, six say they're planning to expand their portfolios of real estate and other alternative assets. Several funds pointed to an expectation that yields on bonds will remain negative in coming years. Denmark has already had more than seven years of rates below zero, longer than any other country.

Jan Ostergaard, who oversees unlisted investments at Industriens Pension, a fund with about US$26 billion in assets, says the appeal of real estate is that it's "low risk" with "stable returns."

The focus on property assets comes as institutional investors in Denmark await the publication of a government-commissioned report that will guide legislation in the rental market. According to a copy of the document seen by Bloomberg, models discussed include capping rents so that firms would potentially see the value of their investments cut in half.

Kaare Dybvad, Denmark's housing minister, has criticized some investors for taking advantage of what he calls "holes" in existing legislation. But his ire has been focused on international buyers and he has repeatedly singled out Blackstone Group Inc after the firm started buying up large chunks of Danish real estate in recent years.

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Michael Bruhn, the head of real estate at PFA Pension, which oversees about US$90 billion in assets, says most of the investing done by Denmark's second-biggest pension firm is in so-called core projects. Those involve buying prime real estate and investing in new buildings with little need for renovation. But PFA also does projects similar to those targeted by Blackstone, in which existing properties are renovated, he said.

"We are approaching the end of this economic cycle and our customers want an above average risk. We have the most appetite for value-add investments going forward," Bruhn said.

Blackstone has been criticized by the Danish government for charging excessively high rents after investing in renovations. The firm has countered that it renovates buildings that haven't been upgraded "for decades." Blackstone also says it only represents around 0.5 per cent of the Copenhagen rental market.

In an interview with Denmark's state broadcaster, DR, Blackstone's head of real estate in Europe, James Seppala, said: "We are focused on long-term value creation for our investors that are predominantly public-sector pension plans from all over the world."

None of the pension funds contacted by Bloomberg said they partnered with Blackstone on any of their property investments.

According to the report, which is due to be published this week, one model includes scrapping a provision in Denmark's housing law that lets property owners increase rents substantially if they carry out renovations for more than 183,000 kroner (S$37,200). According to the model, owners would see the value of their investments in the major Danish cities decrease by as much as 47 per cent, the documents show.

Residents would face average rent price increases of about 40 per cent instead of the current average of 80 per cent after landlords complete renovations, under the model.

For pension funds in Denmark, such changes wouldn't upend their investment models, according to Peter Olsson, managing director of AP Property, a unit of AP Pension, which has about US$20 billion under management. He says that AP doesn't use the model for which Blackstone has been criticized.

"We are going to increase our investments in real estate from about 5 per cent to around 10 per cent regardless of the current political focus," Mr Olsson said.



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