MIPIM 2010: Non-British funds will benefit as UK investors look to increase RE exposure

British life companies and pension funds will increasingly eye direct real estate investments inside the UK, but when it comes to overseas investments non-listed property funds will be key.

UK institutional investors will look to increase their exposure to real estate over the next few years, however they will largely reject unlisted funds focused on Britain in favour of making direct real estate investment themselves.

A survey by the European Association of Investors in Non-Listed Real Estate Vehicles (INREV) has revealed that the amount of UK institutional capital targeting real estate will grow by a fifth from £80 billion (€89.6 million; $122 million) today to roughly £97 billion in the next three years.

INREV said the [UK] non-listed institutional universe could be expected to grow by almost a quarter in the next few years with “almost all this increase … likely to be accounted for by non-domestic investment”.

At present, roughly two-thirds of that real estate universe is made through direct investments, a trend that is expected to continue. Large pension funds, in particular, were wary of investing through the unlisted fund model not least because of fears over risk and illiquidity, and LPs’ “weak control and influences over non-listed funds”.

However, when it comes to investing outside the UK, unlisted vehicles are expected to come to the fore, with the total amount of capital targeting the non-listed sector expected to increase by a quarter over the next three years, to £28 billion from £23 billion today.

INREV’s director of research Lonneke Löwik said overseas funds were the fastest growing element of the unlisted real estate sector. “Helping investors deploy capital abroad will be a key element to the expansion of non-listed funds.”

Life company and pension fund investments in non-listed real estate funds total roughly £23 billion at present, equivalent to 2 percent of their total assets and 29 percent of their global real estate investments. INREV said the non-listed institutional universe could be expected to grow by almost a quarter in the next few years with “almost all this increase … likely to be accounted for by non-domestic investment”.

UK pension funds are currently under allocated to real estate by an average of 1.3 percent, but the survey revealed many would increase their exposure taking the average UK pension fund target to the asset class to 7.9 percent. Life companies in general are expected to lower their allocations to real estate “a continuation of the downward trend underway since the mid-2000s”, INREV said.