Dutch public pension funds ABP, bpfBOUW and SPW are increasing their exposure to the domestic residential mortgage market, despite the cooling real estate market.
Through their pension manager APG, the funds have joined DMFCO’s platform, which invests in residential mortgages provided by MUNT Hypotheken, which was launched in 2014. The total investment by the three funds is EUR1.74 billion and as a result nine of the 10 largest pension funds in the Netherlands now invest in residential mortgages through DMFCO.
Undeterred by the 2008 financial crisis, APG’s outlook for Dutch real estate in 2023 is optimistic It forecast a “slight drop in home prices, which may encourage the buyers to be more critical than in the overheated housing market of recent years. However, the price decline will be limited to about 5%, due to the housing shortage and the fact that the labor market is in good shape.”
Kay Mennens, senior portfolio manager at APG, said, “Our pension fund clients prefer to invest more in the Netherlands. The Dutch housing market offers the perfect opportunity. For our clients, mortgages continue to offer added value in the investment portfolio. There are two main advantages: they provide a solid investment in the Dutch housing market with a stable return while assuring Dutch homeowners of a good mortgage with fair conditions.”
In an interview published on the manager’s website, he stated that APG is not worried about the cooling of the housing market, adding, “Returns are still at a level that an investment like this is interesting enough for investors. However, fewer mortgages are expected to be taken out in the coming years. In recent years we saw that there is a lower limit for investors in terms of returns. If the return becomes too weak, some investors drop out, temporarily or otherwise, after which the return will pick up again. So I think the outlook is still positive, and we can achieve attractive returns over a longer period. Our goal is to earn 0.75-1% more than the risk-free rate.”
APG has maintained 5-7% of its portfolio in the Netherlands and while it maintains its mandate of getting the best possible risk-return profile, its clients expect it to allocate proactively in the domestic market. As such, it invests in green mortgages via Rabobank subsidiary Vista with a target of EUR1 billion over 2019-2024. APG is also one of the founding members of LIST Amsterdam, a platform for providing loans to Dutch housing associations.
However, in real estate debt markets, APG has cast its net across a broader range of geographies. Last August, it exercised an option to double its real estate debt exposure in Australia with MaxCap Group to A$1.2 billion (US$790 million). It had already lifted its debt mandate once with the non-bank lender since investing an initial A$300 million in 2019.
Graeme Torre, APG managing director and head of real estate for Asia-Pacific, said, “Commercial real estate debt, as an institutional asset class in Australia, is a proven strategy that offers strong risk-adjusted returns for the benefit of APG’s pension fund clients and their participants.”
Altogether, APG reported a mortgage portfolio of EUR3.11 billion at end-2021 with an annual return of 2.7%, representing 537 basis points of excess return.