In the past few months large pension funds in the Netherlands have been offloading their listed real estate and opting for a portfolio of unlisted property in real estate funds

In February 2011, property investment managers at the UK's National Association of Pension Funds' (NAPF) conference in Edinburgh confirmed this trend; the short-term future is in global diversification through real estate. Pension Funds Insider looks at the benefits that this strategy can bring pension schemes

Diversification is again the word du jour for pension schemes worldwide. The search for variety has led to some funds deciding to refine their property allocations. To date, PNO Media, SPMS and Philips in the Netherlands, have all chosen to move away from listed property.

According to many investment managers global funds can bring outcome, and this is exactly what SPMS and Philips, for example, have chosen to invest in. Moving away from the Dutch market they asked Aviva Investors to take their money and go global.

Eric Drent, a communications officer at Philips, says the scheme made the choice in order to become more flexible.

"We wanted a better return," he says. "We wanted to leave the Netherlands and with this deal we could. Because they invest globally, there is more diversification."

Stephan Vollenbroek, communications manager for PNO Media, says their scheme's decision had a similar motivation. "From risk studies that we carried out we saw that listed property in PNO Media's investment mix no longer added any real value.

"Short-term real estate equity has more risk. But the liquidity of real estate equity is also relatively low which is why it is less useful for asset allocation," Vollenbroek explains. "Because we need to focus on returns in the short-term we have chosen to get the exposure we need through unlisted real estate."

A lot of investment managers will tell schemes that in order to go global in unlisted space they will need a minimum of £75m to £100m. But of course, if you are a smaller pension fund, you still have the option to go global through a pooled fund. The message, also advocated at the annual UK NAPF Investment conference, seems to be that in real estate there is something for everyone and now is the time to up allocations.

But whereas the Brits are just talking about it, the Dutch appear to be ahead of the curve says John Gellatly, head of real estate multi-manager Europe at Aviva Investors.

"The Dutch schemes were on to this really early and much of their real estate is held indirectly," he says. "It is divided by public equity where they take large strategic stakes in listed companies and unlisted real estate."

Gellatly says that people have never really gone global with their real estate because buildings are so site specific and because property used to be much more opaque.

"So people never really went abroad to diversify unless they were extremely big investors. This was because that strategy required a whole new infrastructure. People did not know how to undertake that strategy," he says.

Over the last ten years, however, the opportunities for unlisted funds in the more mature markets, particularly in the UK and Europe, have grown. Managers offer pooled funds where investors from different sizes can get diversification exposure.

"This is now going more global because transparency and infrastructure in more foreign markets is improving," says Gellatly.

And of course, property investors will find it hard to hide from the emerging markets bandwagon.There may be signs that the risks are getting higher, but very high returns remain on the table.

"What we see," says Gellatly, "is that many clients are very risk averse now. They want safe real estate investments, to keep leverage under control and so they choose the more mature markets to invest in. This is all natural after the crisis of course. But others, who have been badly burned over the past five years ask for the other extreme, they need cash and are willing to take risks in return for good profits in more emerging markets."

The appeal is clear. With underlying lease structures, real estate turns into a real asset and gives real diversification benefits; it is a high yielding asset class with a good cash flow and performance return. Leaving home markets pension schemes are exploring this new territory, hoping that the world is their oyster.

azeevalkink@wilmington.co.uk   

First published 11.03.2011