UK investors back real estate

More than half of the UK’s institutional pension funds are planning to increase their commercial property investment allocation despite the dramatic falls in values since 2007, according to research published this week.

A survey of pension fund managers and trustees, managing an estimated £140 billion (€152 billion; $222 billion) of assets, has concluded that 52 percent expect to increase their investment in commercial property in global and domestic markets between now and 2012.

The research by the Pensions Management Institute and Prupim, the property management arm of UK insurer Prudential, found fewer than one in six expected to lower their fund’s exposure.

“After a traumatic period for commercial property, institutional investors appear attracted to the relative cheapness of the asset class compared to other alternatives,” said Paul McNamara, head of research at PRUPIM.

He added bargains were available for cash-rich institutional buyers and that investors liked the advantages of diversification.

The report, called ‘What’s on the Horizon 2009, Real Estate Investment for UK pension funds’, also said investors were taking a “back to basics approach”. 

This means they are tending to favour more mainstream vehicles over “exotic alternatives” and they are expecting lower, steadier returns, as well as prizing clear investment processes and strong operational risk management above all other factors in a successful fund manager.

More than 80 percent of respondents plan to increase or maintain their exposure to commercial property.
The report also reveals an increasing appetite for global property markets – nearly a quarter are investing globally. That is higher than 14 percent a year ago. A similar number – 24 percent – expect to increase their global investments over the next three years.

“The commercial property crash has been a global phenomenon but even though a number of the world’s mature property markets are still some way from correcting, the research suggests investors are increasingly recognizing the opportunities and benefits of diversification in different territories, with Europe by far the most favoured overseas market for these investors,” said PRUPIM’s McNamara.

Also revealed is that investors are more likely to invest through pooled funds and other unlisted investment vehicles, double the proportion of respondents who use fund of funds and four times those who take direct approach to real estate ownership.