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 new research published yesterday (September 28, 2009).
A survey of leading pension fund managers and trustees, managing an estimated £140 bln. in assets revealed that 52% expect to increase their investment in commercial property in global and domestic markets between now and 2012. Fewer than one in six respondents expect to lower their fund's exposure, according to the research by global real estate investment manager PRUPIM and the Pensions Management Institute (PMI).
"After a traumatic period for commercial property, institutional investors appear attracted to the relative cheapness of the asset class compared to other alternatives; the bargains available for cash-rich institutional buyers and the traditional advantages of diversification," said Professor Paul McNamara, Director, Head of Research at PRUPIM, who unveiled the annual 'What's on the Horizon 2009, Real Estate Investment for UK pension funds' report, at the PMI Autumn Conference.
"While institutional investors appear to have a greater appetite for commercial exposure, they are taking a back-to-basics approach. They are tending to favor more mainstream vehicles over exotic alternatives; are expecting lower, steadier returns, and they prize clear investment processes and strong operational risk management above all other factors in a successful fund manager," he added.
More than 80% 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 (23%) of respondents investing globally, sharply up from 14% a year ago. A similar number (24%) 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 favored overseas market for these investors," added Prof. McNamara
The report also reveals:
- Investors are more likely to invest through pooled funds and other unlisted investment vehicles, double the proportion of respondents who use 'property fund of funds' and four times those who take direct ownership of real estate. Investment through the usage of property derivatives has also increased, albeit from a low base.
- The most prized main characteristics of a successful real estate manager were clear investment process, good operational risk controls and top quartile performance.
- Diversification remains the most common reason for moving into commercial property, as funds seek the asset's low correlation with other asset classes.
"The research for the 2009 report suggests that the UK pension fund community's view of the asset class is in a state of flux. After the unprecedented falls in commercial property values of the last two years, the renewed appetite for commercial property is accompanied by a demand for clarity of investment process, strategy and performance," said Vince Linnane, CEO of PMI.
"We calculate that these respondents manage approximately 15% of UK pension fund assets, so these findings are a significant bellwether of investor sentiment. They imply increases in pension fund exposure to UK and, to a lesser extent, international property but also strongly suggest that asset allocators will demand clear and robust investment processes from investment managers," added Prof. McNamara.