London Property Deal Leaves ATP Fund Wary of Currency Risks

Denmark’s biggest pension fund just teamed up with AXA Investment Management to buy two hotels in central London.

But the “extremely expensive” market is an increasingly tough place to do deals even for seasoned institutional investors, according to Michael Nielsen, a director at the real estate investment unit of ATP.

“The cheap price of money is pressing up prices,” Nielsen said by phone. “There are some markets where the initial yield is below 4 percent. That is not something we would do.”

For ATP, which is based north of Copenhagen, it’s only the third time the $100 billion fund has invested outside Denmark without going via a third party, and the first time in the U.K. The fund would prefer to stay in the euro area as record-low interest rates add to the cost of currency hedges.

“The currency risk and the cost of hedging currencies is related to the interest rate, so with the current, very unusual levels that we have in many countries, it’s very expensive to hedge, especially the U.S. dollar, the Swedish krona and the sterling,” Nielsen said. ATP’s pension obligations are denominated in the Danish krone, which is pegged to the euro.

Volatility term structures are moving higher before Thursday’s European Central Bank meeting, with the one-week euro-pound contract hitting its highest since late August, on an intraday basis.

ATP said on Friday it bought the Club Quarters’ hotels on Ludgate and Gracechurch in a joint venture with AXA, with each paying about $130 million. “We are very selective,” Nielsen said. “The pricing we see in London is very aggressive.”

But despite all the speculation about bubbles, real estate still offers an appealing alternative to long-term investors like pension funds. In London, demand for property is outstripping supply. The city and its surrounding counties will need at least one million new homes in the next 10 years to meet demand, the Adam Smith Institute research group said in a report this month.

ATP’s real estate unit targets about 5-7 percent in annual returns, Nielsen said. The fund holds about 6 percent of its total assets in property. It started doing direct purchases some two years ago, but has been investing through real estate funds for about 12 years.

“Right now, the asset class can deliver a rather favorable return, a long-term, stable return, and we know that other asset classes, bonds for example, don’t deliver the same return level,” Nielsen said.

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