UK pension plans still warm towards real estate

Capital allocations to real estate by UK pension plans are not in free fall despite many parts of the world experiencing drops in capital values.

A study of British pension fund trustees by London-based global real estate investment manager PRUPIM and the UK pension body, the Pensions Management Institute (PMI), has found the majority of investors will maintain or increase their allocation to property over the next three years.

The report, called “Real Estate Investment: What’s on the Horizon” and launched today, suggests that more than 25 percent of UK pension funds will raise their asset allocation to commercial property while 50 percent will maintain their current allocation over the medium term. Vince Linnane, chief executive of PMI said it was vital to assess perceptions to real estate as an asset class “after the major capital falls since mid-2007.”

The research has also shown that pension funds still value the diversification and the relatively steady and occasionally high returns that real estate can offer as an asset class.

Paul McNamara, director and head of research at PRUPIM, said the findings would provide a welcome confidence booster. He said: “Given the difficult times in the commercial property market over the past year, this is welcome vote of confidence from institutional investors.” He said it was “reassuring” that pension fund managers and trustees still saw opportunities in UK and international commercial real estate markets over the next three years.

Over the past decade, a noticeable trend among UK pension plans has been to diversify their property holdings internationally. It seems that in doing so, they are also prepared to shoulder greater risks in return for higher returns. The research found that unlike their typically core, core-plus approach to UK property investment, when investing overseas many seek out value-added and opportunistic investment returns.Almost half of pension funds questioned for the report said they already had exposure to real estate markets outside the UK.

The research was conducted, however, in June – well before the seismic events of the past fortnight which saw Lehman Brothers cease to exist as an independent entity, Merrill Lynch sold to Bank of America, the US government bail-out of American insurance titan AIG and a $700 billion rescue by the US Treasury aimed at buying up troubled mortgage assets. Yesterday, the large stand-alone investment banking model of Morgan Stanley and Goldman Sachs also ceased to exist when the two institutions opted to become bank holding companies to ease their own balance sheets.

Last week, INREV, the European Association for Investors in Non-listed Real Estate Vehicles, said that more than 70 percent of institutional investors were raising their allocations to other asset classes owing to the denominator effect warning that the value of their real estate holdings had risen as a proportion of their total assets because of a slump in share prices and bonds. INREV’s investor survey concluded though that in the medium-term, more than 70 percent plan to increase their allocation to real estate mainly through non-listed vehicles.