Danish REITs

Danish REITs


Business optimistic for Danish REITs

DENMARK – Denmark could be the next European market to introduce investment trusts (REITs), if lobbying by the Danish Home Federation (DPF) proves successful.

A report published in a few days will urge the government to mitigate a tax regime which requires investors to pay for both corporation tax and income tax on indirect real property investments.

“Tax transparency is the issue, ” said DPF leader Rolf Norstrand. “Everything else must be flexible. ”

Although Denmark is unlikely to introduce a REIT for the short term, Norstrand said discussions around an EU REIT directive and OECD criticisms associated with double taxation had bolstered his case.

“A year ago, whenever we first raised the issue, the minister was afraid of dropping tax revenues. Since then other countries have introduced REITs and also the Danish government has been able to see there’s a tax-competitive aspect into it. That will help, ” he said.

Property tax anomalies stay in some markets that have introduced REITs. REIT-style legislation in Finland within 2006, for instance, failed to lift double-taxation provisions.

The UK Treasury announced in July it would remove taxes penalties on investment in UK property authorised investment funds (PAIFs) from 2008 inside a move that will give them the same tax status as REITs introduced at the start of the year.

REITs have turned in a credible performance in European markets which have introduced them, although the UK has bucked a largely good trend, with REITs among the worst performers in the FTSE All-Share catalog since their introduction.

danish-reits
Investing the REIT way Danish

Bouwinvest, which manages the actual estate assets of the Dutch construction workers’ pension fund, spent last year rethinking its allocation to real estate included in its strategic plan for 2012-14, and decided to expand it’s allocation to REITs.

“Part of the international mandate of Bouwinvest is to purchase real estate securities; REITs are currently only a small part of the investments, ” says Stephen Tross, director of international opportunities at Bouwinvest. “We are going to increase the allocation for a number of reasons. First of all, holding REITs increases the liquidity in our portfolio and, secondly, the capital reserve requirements put forward through the central bank are lower than for unlisted real estate, due to the greater liquidity.

“Thirdly, we use listed real estate because there are specific propositions or areas where the best real estate is kept by listed REITs. ” Tross says these vehicles then get to be the only or preferred way to gain the desired exposure. For instance, most regional shopping malls in the US are held through REITs, he says.

Bouwinvest has €100m invested in REITs. “We are actually increasing it to €300m and we’ll see where we proceed from there, ” Tross says.

Because of the higher volatility, REITs still only constitute a relatively small portion of Bouwinvest’s overall €6bn property investments for that construction workers’ fund. Just under €2bn is invested internationally and €4bn is at the Netherlands.

While some argue that REITs are too much like equities to be useful in a real estate portfolio, Tross says this will depend on how an investor uses the vehicles.

“We are a long-term investor and that is also how we invest in listed real estate. We possess a buy-and-hold strategy, ” he says. “We view REITs as a part of our tactical asset allocation. If we view certain property markets and sectors as attractive in line with the fundamentals, we will look at both listed and unlisted opportunities so you can get exposure.

“If there is similar quality real estate in the listed vehicle, which trades at a discount to NAV, then that could be an advantage to an unlisted vehicle when you have to visit in at NAV, ” Tross says. That discount has to become analysed, of course, he adds.


“Peter Olsson
AP Pension
Direct investments are best method to gain RE exposure
Fund may consider REITs after merger along with FSP”


Denmark’s AP Pension is a significant investor in home, like many of its domestic counterparts. At the end of this past year, the customer-owned commercial pension provider had 11. 6% of it’s €7. 4bn in assets invested in land and buildings.

The allocation is committed to direct property in Denmark, and indirectly in unlisted property funds outside its real estate market. As things stand, REITs play no role for AP Type of pension.

“We’re not using them at the moment, ” says Chris Olsson, head of property investments. “Of course we have regarded as it, just as we consider all business opportunities. ”

Precisely why the Danish fund is staying out of REITs and other listed property investments for the time being, has to do with resources, he explains. “It always takes time for you to look into a new investment area, and we have restricted time, ” he says.

AP Pension is currently involved inside a merger with FSP, the Danish labour-market pension fund for monetary sector employees. A merger between any two organisations takes time and uses resources within the run up to its completion, and this is the case for AP Pension at this time.

But Olsson also has some doubts about the suitability of listed property vehicles for AP Pension’s property portfolio. “They are more related to equities, ” he says. “If you want exposure to property, then the best way to get that is through immediate property of unlisted funds. ”

However, when time does permit, Olsson expects AP Pension to examine the possibility of adding listed property towards the portfolio. The vehicles certainly have benefits, he says, notably the flexibleness they can offer within a portfolio that is traditionally firm and illiquid.

“It is something that could be appealing to a lot of investors, ” he says. “Of course they are interesting, as well, from a liquidity perspective. The liquidity in direct real estate is among its big disadvantages, and that’s absolutely something that means listed property could be attractive. ”


“Arjan Vermaire
Pensioenfonds Vervoer
Correlation between REITs and equities excessive
Direct property fits in well with overall portfolio”


Pensioenfonds Vervoer, the actual Dutch transport industry pension fund, has allocated 3% of its €13bn of assets to property. However, none of this is currently invested via listed automobiles, such as REITs, nor does the pension fund have any plans to make use of them.

Arjan Vermaire, strategist at Pensioenfonds Vervoer, agrees that there are numerous problems associated with listed property vehicles as far as institutional investment in property is concerned.

For one thing, the market behaviour of REITs is too much like equities, he believes. “Long-term correlation with equities in studies is usually 0. 5 to 0. 7, with short-term lagged correlations sometimes greater than that, ” Vermaire says. But he adds that in order to prevent over-diversification, it is prudent to use a higher correlation within long-term ALM studies.

That some REITs have a small number of investors owning large stakes can often be an issue for potential investors. “From a liquidity standpoint this particular matters, ” he says.
Blending listed and non-listed real property investment, as some institutional investors do, will create lower beta because of differences in IFRS treatment of valuation policies, Vermaire says. “However comparability will walk out the window, ” he notes.

“Listed is always a bucketing issue, ” he says. “Is it real-estate or equities? If you need the liquidity and want to purchase real estate it might be an idea. If you don’t need the liquidity you’re better off with diversifying absolute-return characteristics amongst which there is definitely an inflation component as well. ”

This is the case in real estate investments where the amount of leverage is on the low side, Vermaire says. Otherwise, he or she adds, the indirect returns end up pretty much erasing this particular inflation-tracking effect.

“We do invest in non-listed real estate and therefore are still thinking about our strategy, ” he says. There are many factors to become considered, he says. For example, offices seem to be really highly correlated across countries in prime locations. “You wonder if the volatility isn’t too big for the returns. ”

In the finish, bricks and mortar fits in well with the overall portfolio due to the way it spreads risk. “We like the stable cash circulation, direct return characteristics in order to have a diversifying impact towards, for example, equities, bonds and so on, ” states Vermaire.

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