Germany's Largest Pension Fund Investigated By Bavarian Parliament For Risky U.S. Real Estate Bets

Pension fund Bayerische Versorgungskammer, after being named as a defendant in a lawsuit against developer Michael Shvo, is under fire in the Bavarian State Parliament for its real estate investments.

BVK, Germany's largest pension fund, has been one of the top German investors in American real estate over the past few years as part of a push in global investment that began in 2015. By 2021, more than half of BVK’s real estate investments were outside of Germany, while the fund continued to emphasize “a need for growth in the real estate portfolio in the USA,” it wrote in its 2021 annual report.

That growth has included investments in projects developed by Shvo and backed by Deutsche Finance, which manages investments for several German funds. BVK put pensioners' money into Shvo projects like the Coca-Cola Building on Fifth Avenue in Manhattan and the Transamerica Pyramid in San Francisco.

In its 2020 annual report, the fund called the $650M purchase of the Bay Area icon “the most spectacular real estate acquisition that BVK achieved in its 20-year history of investing in real estate outside of Germany.”

But BVK's decision to back Shvo's high-flying real estate purchases — which have come under scrutiny this year amid reports of sluggish sales — have caught the attention of lawmakers in the German state of Bavaria, where BVK is based, Munich-based tabloid Abendzeitung reported.

After Abendzeitung’s reporting brought attention to the drama, the state parliament asked BVK to answer a series of questions about its decision-making.

“According to media reports, the Bavarian Ministry of the Interior's supreme authority Versorgungskammer (BVK) invested high three-digit million amounts directly or indirectly in luxury real estate in the USA, which was developed by a convicted tax evader,” Bavarian Parliament officials said in a letter obtained by Bisnow and translated into English. “High losses are looming, forcing those responsible at BVK to explain themselves.”

In 2018, Shvo pleaded guilty to tax evasion related to personal goods. Under his plea agreement, he was required to pay $3.5M in taxes and penalties.

“As members of the Bavarian state parliament, we have the responsibility to control the actions of the government,” Parliament Member Tim Pargent told Bisnow in an email. “I want to find out what kind of control mechanisms the Ministry of the Interior uses to check and, if necessary, prevent risky investments.”

BVK has said that its investment in Shvo is only through shares it holds in an indirect fund together with other investors, which in turn is invested in real estate projects. 

“Overall, BVK's investment strategy is also geared towards the long term and security of investments. Our established risk management and broadly diversified portfolio performance has been proven for our members, participants, and pensioners,” a BVK spokesperson said in a statement. “As things stand, we will once again achieve a return above the required minimum interest rate this year.” 

In a statement to Bisnow, a Shvo spokesperson pushed back on the idea that the developer's investors are likely to take losses. The Transamerica Pyramid, which reopened in September after the owners invested $1B in the building and renovations, has signed leases with several tenants for more than $250 per SF, along with three recent leases ranging from $125 to $180 per SF, according to the Shvo spokesperson.

At 711 Fifth Ave., the developer, which is known for redeveloping prestigious properties across the country, said it has doubled rents in some cases, achieving up to $180 per SF.

“The investments SHVO and Deutsche Finance made in partnership with a consortium of German institutional investors in U.S. super prime office assets have outperformed the broader office market,” the Shvo spokesperson said. “According to the most recent valuations, the value of our commercial portfolio has increased by hundreds of millions of dollars, a result of dramatic rent increases that we have achieved by repositioning these assets.”

A bitter legal dispute between Shvo and the members-only Core Club, which is a tenant at Transamerica Pyramid and 711 Fifth, brought BVK's backing of the developer to the fore.

Core Club filed a $600M lawsuit in June against BVK and Shvo, accusing the developer of making a series of “broken promises” about the build-out of the club's space and trying to strong-arm his way into an equity stake in the business. The lawsuit names BVK as the true financier and owner of the projects.

BVK released a statement after the lawsuit was filed, saying it has no relationship with Shvo, adding that “we distance ourselves in every respect from the illegal and dishonest business conduct that is presented in the lawsuit.”

Shvo slammed Core Club in a motion to dismiss the suit, alleging that the business is penniless and is orchestrating a “public hit job” to receive a rent reduction and other concessions.

BVK's funds are also invested in other Shvo projects, including a luxury condo redevelopment of The Raleigh in Miami Beach. 

BVK oversees €106.8B in investments — more than €7.5B of which are direct real estate holdings. However, despite allocating more funds to U.S. real estate in recent years, it hasn't been the biggest spender from the country. In the five years leading up to 2022, Allianz, Deutsche Finance International, Commerz Real and Jamestown, based in Atlanta but backed by German funds, all spent more on U.S. CRE than BVK, Bisnow previously reported.

German investors overall spent $5.9B on U.S. commercial real estate in 2019, according to MSCI data. Then, in 2020 and 2021, even with pandemic-related travel challenges, their spending totaled $3.9B and $2.2B, respectively. 

That enthusiasm appears to be waning.

Germany was the third- and fourth-most-active nation for inbound U.S. CRE investment in 2022 and 2023, respectively, but its deal flow has slowed. Over the past four quarters ending in June, German investors spent just $814M on commercial real estate in the U.S., according to data from MSCI. That dropped the country down to the seventh spot on MSCI's cross-border rankings, overtaken by Italy, France and the UK.

At the same time, German banks have also raised red flags over their exposure to U.S. real estate. In the first quarter, Aareal Bank announced it would cut or restructure about $550M of loans with exposure to the overseas market. Deutsche Bank is similarly looking to sell $1B in U.S. CRE loans. Deutsche Pfandbriefbank said it is planning for additional losses due to “the greatest real estate crisis since the financial crisis.”

BVK, which manages assets for 12 pension institutions, also backed away from the real estate market earlier this year. 

In a financial statement, it said the expansion of strategic asset investments over the past few years has hit “an end point,” IPE reported in May. Instead, BVK said it plans to move back into fixed-income investments and reduce other assets in its portfolio.