New defined contribution pension schemes in the UK could contribute £170 billion (€200 billion; $275 million) to real estate by 2030, according to research published today by the Pensions Institute at Cass Business School.
According to its report, entitled Returning to the Core: Rediscovering a Role for Real Estate in Defined Contribution Pension Schemes, the auto-enrollment segment of the defined contribution market will increase by six times by 2030 from £276 billion in assets under management last year to £1.68 trillion by 2030. The report noted that “several” new DC schemes designed for auto-enrollment have selected real estate as a core component of default asset investment strategies.
While the spread of weightings among the pension schemes included in the research was between a 5 percent allocation and a 20 percent allocation, it found an average of 10 percent would be adopted by the majority. That means, “if this trend is adopted across the market, real estate AUM in these funds might be worth £170 billion by 2030.”
In terms of favored investment conduits to the asset class, the research noted that actively managed funds of UK property and passively managed funds of global listed real estate companies, typically REITs, would prove most popular. It tipped real estate derivatives and debt funds as potentially playing a part in the future but acknowledge there is little evidence of these sub-classes being “tapped” as of yet.
However, the report warned of a “wide gap” in the understanding between professionals investing defined contribution schemes and real estate professionals. “On the one hand, real estate asset managers argue that there is a major disconnection between what DC default funds want and what they need,” the report stated. “On the other hand, DC professionals argue that real estate asset managers tend to over-engineer their funds and concentrate too much of their marketing presentations on the sub-classes and the underlying holdings.”
According to the report, “the DC approach” should focus more on “high-level asset allocation” and seek “market average” or “market-plus/ beta-plus” returns. Further, DC funds require daily pricing and liquidity for all assets – a potentially counterintuitive mindset for real estate professionals. “Nevertheless, there are early signs that the real estate asset management arms of insurance companies are gaining some market share because they are beginning to understand DC objectives better,” the report noted.
The report listed other areas of concern as well, including the lack of a meaningful target for a DC investment strategy to aim for, such as a “target income replacement ratio”; disagreement between professionals about modeling assumptions and methodologies to evaluate performance of certain types of real estate; how third-party proprietary modeling services are not, by inference, available to independent scrutiny; and accessing certain judging models for assessing results.