Despite the fact that many governments around the world are growing ever more concerned about the rise in real estate prices, Denmark’s largest pension fund ATP seems content to switch more funds into the real estate sector. The pension fund has announced plans to switch part of the group’s $120 billion investment portfolio away from inflation linked bonds and into the real estate market – despite concerns about a possible short to medium term fall in property prices.
A number of high-profile investors have recently suggested that real estate could be a more sensible long-term investment for pension funds which require long-term cash flow and inflation protection. At this moment in time it seems as though the worldwide real estate market is offering such protection and the more investment funds which switch their assets the more support for the market.
Nordic property prices
At a time when the Danish pension fund giant is looking to switch billions of dollars into real estate, it is interesting to learn that regulators in Sweden and Norway in particular are growing more concerned about rising real estate prices. Indeed there have also been words of caution from Denmark’s largest lender, Danske Bank, suggesting that house prices in Copenhagen are rising too quickly.
Quote from PropertyForum.com : “There was a quite startling revelation by the Office for National Statistics this which suggested that one in 10 adults in the UK are now millionaires. Indeed the same report also suggested that one in five university graduates have also gone on to achieve millionaire status.”
We seem to be in the throes of a two-way pull for the real estate market with Norway’s sovereign wealth fund also looking to increase its real estate exposure to around $33 billion. This would equate to a 5% asset allocation on the overall fund and investment manager still have much work to do with real estate only accounting for 1.2% of the total portfolio value at this moment in time. Investment managers will need to be careful when looking at potentially overstretched real estate markets and they may have to dig deep to find acceptable long-term value.
Low interest rates help real estate
When you bear in mind the rents available on real estate investments around the world, not to mention the short to medium term capital gain potential, it is not difficult to see why some investment funds are still looking to switch assets. The return on government bonds is currently relatively low and with inflation all but eating up overall returns perhaps it is no surprise to learn that real estate is back in favour?
However, this does beg the question, what will happen to the worldwide real estate market when interest rates finally rise?
Asset class selection will be critical
While these two funds in particular are looking to invest billions of dollars into the worldwide real estate market, they will not invest for the sake of it. It may take some months or even some years to increase real estate exposure to the levels which they are targeting although in the meantime will the wave of investment money moving towards the real estate sector keep prices moving forward?
A commonsense approach to property markets such as those in the UK, and indeed the Nordic markets, would suggest they have moved too far too quickly but the ever constant flow of investment funds into the sector could easily push prices further ahead in the short to medium term. How far can they go? When will a potentially over stretched real estate market finally turn downwards?