Bavarian state fund sees timber returns easing property malaise

Germany’s biggest public pension fund said timber investments are helping to make up for a deteriorating real estate market as insurers compete for property deals.

Returns on Bayerische Versorgungskammer’s €300 million ($387 million) timber portfolio will exceed 7% in 2012, Chief Investment Officer Daniel Just said in an interview in Munich. That compares with an expected return of 3.7% to 4% over BVK’s €55 billion of holdings, Mr. Just said.

BVK, a department of the German state of Bavaria’s Ministry of the Interior, earmarked €1 billion for direct real estate investments this year, Mr. Just said in April. BVK, which combines 12 pension plans overseeing compulsory retirement funds for doctors, architects, lawyers, Bavarian lawmakers and chimney sweeps, won’t meet that target as it’s unprepared to compete with rivals willing to accept lending limits “significantly higher” than 80% for German retail property, Mr. Just said.

“We’ve been searching for deals that match our investment criteria like crazy, but we couldn’t complete much,” Mr. Just said. “In real estate lending, a lot of insurers seem to be willing to accept conditions such as higher lending limits, which we consider inadequate.”

There is “extreme pressure” to invest in real estate from insurers and pension funds alike, Mr. Just said. Market conditions might improve next year as banks are less willing to refinance the property loans coming due, he said.

Still, BVK has had a “good year” as the pension fund will exceed the net minimum 3.5% to 3.7% return target of its various plans, Mr. Just said.