What are the typical challenges for pension funds holding direct real estate investments?

Marco Böhi: Many pension funds face similar challenges when it comes to direct real estate holdings. Portfolios often lack the requisite number of properties to allow for efficient management. At times, there are insufficient internal human resources to develop the properties or, for instance, to carry out sustainable renovations. Geographic concentration is another problem. Where real estate portfolios were built up over many years, they tend to lack diversification. What is more, the properties in the portfolio are often at a similar stage in their lifecycle. If refurbishment work is due at around the same time, a great deal of capital and construction management capacity is required.

What are the main advantages of non-cash contributions for pension funds?

Tamila Chaouche Trapella: First of all, the cluster risk associated with direct holdings of a limited number of properties is significantly reduced. By investing in a larger vehicle, the pension fund instantly benefits from broader diversification across geographical locations, property types and life cycles.

In return for the contribution, the pension fund receives shares in a professionally managed investment vehicle, which increases its flexibility and liquidity while maintaining its overall real estate exposure. The pension fund transfers the operational management and marketing of the properties to a specialised administrator, allowing it to devote more energy to its own strategic management tasks.

What would be the right time for a pension fund to consider a non-cash contribution?

Marco Böhi: A good time would be, for example, when staff changes and internal know-how is lost, or when the real estate strategy evolves. At such times, many pension funds come to the conclusion that an external partner is a better choice for managing and developing their properties. In our view, it takes a portfolio worth around CHF 500 million or more to ensure efficient management. With this in mind, a non-cash contribution makes sense at any time, as it usually results in greater efficiency.

Which vehicles are particularly suitable for a pension fund’s non-cash contribution?

Tamila Chaouche Trapella: Essentially, a distinction is made between publicly traded vehicles, such as real estate stocks or funds, and vehicles that are not publicly traded, such as investment foundations. The latter are particularly well suited to the needs of pension funds. They offer tax advantages and co-determination rights and show significantly less volatility than publicly traded vehicles. Investment foundations are managed by a board of trustees, typically with the support of a specialised real estate committee, allowing investors to play an active role in the decision-making process.

Do all properties held by a pension fund qualify for non-cash contributions?

Marco Böhi: Generally speaking, yes — although the decisive factor is the investment strategy pursued by the target vehicle. Depending on the focus, some properties are better suited than others. As a rule, it is generally easier to contribute residential properties, as there are more such vehicles and demand is higher. If the properties are very specific, the choice of suitable vehicles is usually limited.

How do pension funds find the right partner for a non-cash contribution?

Tamila Chaouche Trapella: First and foremost, the perfect partner must have a solid and demonstrable track record in managing non-cash contributions, ideally across multiple market cycles. Equally important is a stable and transparent performance record for the proposed investment vehicles which should reflect the pension fund’s risk and return targets.

Looking beyond the figures, it is also important that the investment and sustainability strategy is clearly defined and compatible with the client’s requirements and governance principles.

What would you say to pension funds fearing that a contribution in kind will prevent them from getting the maximum price for their properties?

Tamila Chaouche Trapella: This is a legitimate concern, institutions don’t want to see decades of asset building ‘squandered’. However, the most important consideration for a pension fund is to ensure the sustainable protection and growth of the net asset value on behalf of its members, rather than maximising the transaction price at a particular point in time.

Over time, the quality and performance of the chosen investment vehicle are much more important than a few percentage points difference in the contribution price. A diversified, high-performance and professionally managed investment vehicle can offset any initial difference in valuation in the long term. Focusing exclusively on the ‘maximum price’ may result in cluster, illiquidity and market risks being underestimated, although these risks have a much longer-lasting impact.

How does a non-cash contribution work and what do pension funds have to consider?

Marco Böhi: The non-cash contribution process is similar to a traditional real estate transaction. Negotiations take place between seller and buyer. The key difference is that both parties are aiming for a long-term partnership rather than a one-time deal. This perspective also affects the implementation of the transaction.

Why should a pension fund choose the Avadis Investment Foundation to make a non-cash contribution?

Tamila Chaouche Trapella: Avadis has a wealth of experience in the field of non-cash contributions and has assisted numerous pension funds with major transactions. We are experts at every stage of the process, from the initial strategic analysis to the operational integration of the properties into our investment groups, providing support to the pension fund through every phase.

Our Swiss real estate investment groups stand out for their long-term stable performance, competitive costs and rigorous selection of properties and locations. Working with Avadis offers pension funds three advantages that rarely come together in one package: recognised expertise in the field of non-cash contributions, high-performance investment vehicles and transparent governance that allows investors to exert real influence on the guidelines.

What trends do you perceive in the market that could make non-cash contributions even more attractive for pension funds in the future?

Marco Böhi: There is a clear trend towards stricter regulatory requirements, and the importance of sustainability criteria in real estate investments continues to grow. In addition, many cantons have introduced increasingly complex legislation, which makes it more difficult for pension funds to efficiently manage real estate on their own. All of this makes working with professional partners more appealing – and increases the attractiveness of non-cash contributions.