Danish pension fund PFA bets big on property on expectations of prolonged low rate climate

The largest commercial pension fund in Denmark is making a big bet on real estate as it adjusts its portfolio in anticipation of very low interest rates for a very long time.

Michael Bruhn, head of real estate at PFA in Copenhagen, just spent more than US$1 billion on property in Germany as he adds to a real estate portfolio that is now worth over US$9 billion.

It was PFA’s biggest property purchase to date and follows a recent decision to “significantly increase” exposure to that market through 2022. Bruhn says that is roughly the time frame over which the fund is anticipating interest rates will stay about where they are now.

Based in Denmark, PFA operates in a corner of the world that has had negative rates longer than any other country. The Danish central bank first cut its main rate below zero in mid-2012. Back then, the extreme policy was deployed to fight back speculators hoarding kroner during Europe’s debt crisis. But negative rates have proven hard to exit and Danske Bank now warns that the latest wave of uncertainty in Italy and Turkey is likely to keep Danish rates low as money heads for the safest markets.

For investors, that means that the return to more normal market conditions might be further away than they would perhaps hoped. Bruhn says PFA is now keen to expand its investments outside Denmark in an effort to generate higher returns.

“One third of the PFA balance sheet doesn’t produce any interest or any returns,” he said by phone. That includes Danish and German bonds. “They’re just sitting there. So we’re constantly seeking new ways to find income and, of course, balance it with the risk as well.”