Feature – Property
PENSIONS AND PROPERTY: FALLING IN LOVE AGAIN
The word on the institutional investment street is that property and pension funds are in the middle of a romance. They seem- ingly have eyes only for each other’s attractions and like any lovestruck couple are seeing more and more of each other. One example is the Centrica Pension Fund. “Compared with 10 years ago, investment in property was 2.5% of assets, we are now at 5%,” says Chetan Ghosh, Centrica’s chief investment officer. Partly this romance is due to pension funds’ falling out of love with another long-term partner, bonds. That relationship ran aground amid the rocky turbulence of the financial crash, when central banks, struggling to contain the crisis, slashed interest rates to historically low levels. They are yet to recover to their pre-crash heights.
The drastic move in monetary policy transformed fixed income from being a lush, fertile asset class, to an arid low-yield desert and investors accordingly looked elsewhere. The result has been a shift in the make-up of institutional investment portfo- lios, which a decade ago were mostly made up of equities and fixed income, says Doug Rowlands, director of client portfolio management at AEW, a real estate investment manager. The attractions of property make a contrast to the fading appeal of fixed income for institutional investors. “In respect of real estate, you’re looking at a 400 to 500 basis point premium on the typical risk-free rate or the government bond yield, which is attractive, particularly for long-term hold- ers of capital, which are pension savers, essentially,” Rowlands adds.
Along with attractive yields there has been an improvement, particularly in past 10 years, in the infrastructure of the real
38 | portfolio institutional February 2020 | issue 90
estate investment world so the kind of products and routes to investment for investors have dramatically improved and that has also facilitated this growth in the sector as well. Rowlands describes it as “a big trend”.
Shades of grey Indy Karlekar, senior managing director, global head of research and strategy at Principal Real Estate, notes that while traditional sources of yield, which have historically been fixed income, are “very tight”, there has been a steady uptick in allo- cations to property across the world, not only the geographic allocations to property but also the types of pension funds investing in the asset class globally. “Whether a pension fund is in Australia, Europe or the US, there has been a definite shift towards increased allocations within the pension fund industry towards property across the board,” Karlekar says, adding: “We are definitely seeing a shift upwards to broader allocations of property within pension funds.”
In the US, San Francisco, Boston, Austin, New York and Seat- tle are healthy property markets, Karlekar says. While in Europe, London is a strong market though its shine has been dulled by the shadow of Brexit hanging over the economy. Kar- lekar estimates that the uncertainty has forced transaction vol- umes down 30% to 40% in 12 months. Yet as with any romance there are shades of grey in the rela- tionship,
likes and dislikes, ups and downs. Traditional
property, for instance, has seen a pausing or even a decrease in asset allocation, according to Matthew Graham, head of UK pensions at Aviva. But the flip side of that has been an increased
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