Pension funds ‘in flux’ seek solace in real estate

By James Whitmore

Prupim research shows UK pension funds plan to increase property weighting between now and 2012

The worst property slump in modern times has not put off the UK’s institutional investors from investing in commercial property.

Research published this week by Prupim and the Pensions Management Institute shows that half the UK’s pension funds plan to increase their commercial property investment allocation between now and 2012 (see graph and table). Fewer than one in six expect to lower their exposure.

“After a traumatic period for commercial property, institutional investors appear attracted to the relative cheapness of the asset class compared to other alternatives; the bargains available for cash-rich institutional buyers, and the traditional advantages of diversification,” said Paul McNamara, head of research at Prupim.

“While institutional investors appear to have a greater appetite for commercial exposure, they are taking a back-to-basics approach. They are tending to favour more mainstream vehicles over exotic alternatives; are expecting lower, steadier returns; and prize clear investment processes and strong operational risk management above all other factors in a successful fund manager.”

The annual What’s on the Horizon report also reveals an increasing appetite for global property markets: A quarter of pension funds invest globally, sharply up from 14% a year ago. A similar number expect to increase their global investments over the next three years.

“Even though a number of the world’s mature property markets are still some way from correcting, the research suggests investors are increasingly recognising the opportunities and benefits of diversification in different territories, with Europe by far the most favoured overseas market for these investors,” added McNamara.

The report also reveals:

  • investors are more likely to invest through pooled funds and other unlisted investment vehicles — double the number who use “property funds of funds” and four times those who own property directly. Investment through property derivatives has also increased, albeit from a low base;
  • the most prized main characteristics of a successful real estate manager are clear investment process, good operational risk controls and top-quartile performance;
  • diversification remains the most common reason to invest in commercial property, as funds seek a low correlation with other asset classes.

“The research for the 2009 report suggests that the UK pension fund community’s view of the asset class is in a state of flux. After the unprecedented falls in commercial property values of the last two years, the renewed appetite for commercial property is accompanied by a demand for clarity of investment process, strategy and performance,” said Vince Linnane, CEO of the Pensions Management Institute.

(James Whitmore, Property Week)

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