Pensions to allocate $440bn to RE over next 5 years but more needed, says Grosvenor

The real estate investment and fund management business calculates that OECD pension funds will allocate $440bn to real estate over the next five years. But the firm warns that aging populations and vulnerable bond markets should be met with further allocations to income-producing real estate.

Grosvenor, the London-based real estate investment and fund management company, has urged OECD pension funds to react to aging populations and instabilities in bond and equities markets by increasing their allocations to real estate investments.

In its Global Outlook research paper released this week, Grosvenor said while many pension funds still allocate most of their capital to bonds or equities, these markets had become “over-inflated” or subject to “high levels of volatility”.  The firm added that increased real estate exposure would offer a “change to stable, income-producing assets”.

The firm predicted pension funds would allocate $440 billion to real estate over the next five years based on an average weighting of 5 percent to the asset class and an assumption of 7 percent asset growth a year during that timeframe.

But it said as populations across OECD counties age and if bonds and equities continue to be unstable, further real estate exposure could help to enable pension funds to meet liabilities.

“With populations aging across the developed world, pension funds are approaching the point at which they will pay out more to pensioners than they receive in contributions. With bond markets over-inflated and equities subject to high levels of volatility, this suggests a change to stable, income-producing assets such as real estate.”

Grosvenor  questioned however whether there would be enough institutional grade real estate to support a substantial switch in pension fund allocation, suggesting that first movers and those with larger allocations already would benefit first. Pension funds from countries including Switzerland, the Netherlands, Finland and Austria, Grosvenor said had average allocations to real estate of 10 percent already.

“It is currently estimated that there is around $1.5 trillion of institutional investment in real estate globally,” the firm said adding the global annual turnover, baring the boom years of 2006 to 2007 and the depressed year of 2009, was $400 billion.

“An additional $65 billion to $95 billion a year as a result of an increased allocation to real estate of 20 percent would be substantial in this setting and would have a positive effect on real estate pricing. So, with populations aging and bond markets looking vulnerable, it can be argued that pension funds urgently need to re-allocate to real estate. Those that make the early switch will gain the most.”

Meanwhile, Grosvenor Fund Management, the firm’s fund management arm, has appointed Jeffrey Weingarten as non-executive chairman.