The UK institutional non-listed real estate market is set to grow by 20% over the next three years, to £29 billion (approx. 32.4 bln.). The main source of this growth will be due to an increase in non-domestic investments by pension funds, according to a new report by INREV.
"Pension funds' exposure to real estate is currently below targets. Now they are expected to grow to their strategic allocation targets and non-domestic, and therefore non-listed, is likely to be one of the significant beneficiaries of this," said Lonneke Löwik, Director of Research and Market Information, INREV.
The INREV UK Investor Universe report shows that non-listed real estate funds dominate the non-domestic universe and, at almost £8 billion, account for three quarters of the total capital invested in real estate by UK investors outside of the UK. By comparison, non-listed funds account for 22% of domestic real estate investments.
In total, UK life and pension funds' current non-listed real estate universe is estimated to be £23 billion, representing 2% of their total assets and 29% of their global real estate investments. In total, the UK life and pension funds are estimated to have £80 billion invested in real estate. This represents 7% of their total assets.
The report shows that non-listed real estate has become an acceptable and accessible investment approach. All investors in the sample had a mandate for non-listed, with 85% making investments this way.
Life funds and the smaller pension funds (<£2.5 bln.) dominate the non-listed real estate universe, although through different approaches. Life funds' allocations are evenly split between UK specialist and non-domestic vehicles, while the smaller pension funds mainly invest in UK diversified vehicles, with a small proportion in non-domestic & UK specialist vehicles.
Non-listed real estate has increasingly become the convenient choice for most small and medium-sized pension funds as they do not have the resources and scale to invest directly. The report shows that most of them invest in core diversified vehicles with a small proportion also pursuing high risk/return strategies.
Löwik added: "Most investors use non-listed funds to improve the diversification of their real estate portfolios and, in particular, to access out-of-reach sectors and sectors where they do not have the expertise to invest directly. The fastest growing area is non-domestic property. Helping investors deploy capital abroad will be a key element to the expansion of non-listed funds."
The study was undertaken in conjunction with the UK's Investment Property Forum (IPF).