Amsterdam - KLM Royal Dutch Airlines is overhauling its real estate portfolio, barely two years after the last revamping.
To improve its risk-return profile, the e12 billion (US$10.6 billion) pension fund is gearing up to add private real estate equity strategies in both European and U.S. markets to its e1 billion real estate allocation, said Raymond Satumalaij, real estate strategist for Blue Sky Group, KLM's asset management unit.
Next month, Mr. Satumalaij will present the new proposals to the advisory committee for the three pension boards. Once they are approved, Blue Sky officials will begin searching for one U.S. and one European manager.
Blue Sky already has begun discussions about the U.S. search with Atlantic Partners Ltd., Cary, N.C., which will line up potential candidates; the European search will be handled internally, Mr. Satumalaij said.
He expects the searches to be completed by the end of the third or fourth quarter.
Blue Sky Group, which oversees the pension assets for KLM pilots, cabin crew and general staff pension funds, decided to outsource real estate in 1999 to save money.
Prior to 1999, 75% of all realty assets was invested in Dutch properties.; 25% was in U.S. properties. As part of the overhaul, the pension fund sold 60% of its properties.
Last year, Blue Sky hired Property & Portfolio Research Inc., a Boston consulting firm, to help it reallocate the real estate assets.
Peter Hobbs, head of European research at PPR, said his firm did a study for Blue Sky comparing performance of the U.S. and European property markets to determine the best allocations. "We do studies across the U.S. market comparing private and public markets, and believe this is the first study comparing U.S. and European public and private markets," Mr. Hobbs said. "We found that if the portfolio was diversified between U.S. and Europe and between public and private holdings, we got a better risk-return profile. Our recommendations, which were approved, were based on the different behavior of the different markets."
Of the total portfolio, 40% will remain in Dutch properties until at least the end of this year. The target allocation Mr. Satumalaij will propose is 20% U.S. real estate investment trusts, to be primarily actively managed; 20% in European property companies excluding the Netherlands; 10% in U.S. private real estate equity; and 10% in European private real estate equity excluding the Netherlands.
It has been difficult to determine what investment vehicle would be appropriate for private real estate because most limited partnerships aren't liquid enough and involve liabilities that aren't suitable for a Dutch investor, Mr. Satumalaij said. The plan is to develop REIT structures for the private real estate investments, which would provide liquidity. He envisions an umbrella REIT for both U.S. and European mandates that would be designed so the REIT manager handles the property type allocation.
Currently, one-quarter of the portfolio is invested in U.S. REITs, most of it actively managed by Morgan Stanley Investment Management Inc. and European Investors Inc., both of New York. A smaller portion is managed by State Street Global Advisors, Boston, in a passive REIT fund.
The remaining 35% is managed by Dexia Netherlands BV, Amsterdam, in a passive REIT fund that invests in publicly traded European property companies outside the Netherlands.
Mr. Satumalaij said he expects to retain those U.S. REIT managers, and he might eventually add more to get a reasonable tracking error. Funding for the private real estate pools probably will come out of the Dexia portfolio, since that is overweighted.
The PPR study showed the Netherlands segment of the portfolio should be reduced in favor of a greater focus on Europe, the United Kingdom and the United States, Mr. Hobbs said.
It also showed that Asian and Latin American markets should be avoided because they are too volatile and too immature.