Is the Dutch Pension Fund’s Mortgage Craze Coming to an End?

Once a booming avenue for pension funds and insurers, the allure of Dutch residential mortgages has dimmed significantly. In just the first nine months of 2024, new investments plummeted to a mere €2 billion, a stark contrast to the impressive over €13 billion funneled into this sector back in 2021.

From 2014 onward, the trend was clear: pension funds and insurers consistently ramped up their mortgage investments, often adding around €6 billion annually. It was a period marked by robust growth and optimism.

But the landscape shifted dramatically at the dawn of 2022, as the appetite for new mortgage investments waned. Aegon Asset Management and DMFCO, two key players in this market, have pinpointed distinct reasons for this downturn in enthusiasm.

The primary factor? Many funds have already hit their target allocations for mortgages. “It’s not surprising to see growth in allocations stall,” noted Rogier van der Hijden, managing director at DMFCO. “While investors are still keen to maintain their exposure as their assets grow, we’re seeing fewer large transactions.”

A noteworthy exception to this trend is the recent move by the civil service scheme ABP, which made headlines by acquiring a €2.7 billion mortgage portfolio from another investor. Unlike others, ABP maintains a relatively modest investment in mortgages, leaving ample room for expansion. However, this transaction won’t reflect in DNB’s figures until the fourth quarter of this year.

For context, most pension funds jumped into the mortgage market about a decade ago. Some, like the pension fund for telecom giant KPN, now allocate over 20% of their portfolio to this asset class, although they plan to taper that allocation slightly.

According to Rutger Brascamp, head of mortgages at Aegon Asset Management, many funds were ramping up their mortgage investments in the years leading up to 2022, temporarily inflating their allocations.

“The period from 2013 to 2022 was quite extraordinary in this regard. I don’t think the current decline is alarming, as we’re still seeing steady, albeit slower, growth. I’m quite comfortable with where we are,” he expressed.

Higher Interest Rates

However, the timing of this downturn is hard to ignore, coinciding perfectly with the onset of rising interest rates in early 2022. Brascamp acknowledges this connection. “Prior to 2022, we even encountered negative swap rates. The focus then was on seeking yield and the illiquidity premium. But now, as interest rates on liquid loans have rebounded above zero, they present a compelling alternative to mortgages once again,” he explained.

“Investors might also be in a state of shock. The extended duration of mortgage loans—often spanning 20 to 30 years—means that market values suffered significantly due to rising interest rates, with drops of up to 10%. This has led many to adopt a more cautious, wait-and-see approach,” he elaborated.

Yet, Van der Hijden from DMFCO isn’t losing sleep over the slowdown. “We’re witnessing a deceleration in growth, but growth nonetheless. The introduction of the new pension system has also led some funds to delay their investment decisions, contributing to the lowered interest.”

Despite the shifting interest rate climate, Van der Hijden reminds us that mortgages still hold appeal: “Mortgage rates remain 150 basis points above the swap rate. The illiquidity premium is alive and well.”