UK - Alternatives sectors are likely to register more on the agenda as UK pension funds seek to gain more exposure to real estate assets, according to ING Real Estate Investment Management.

Paul Stewart, director at ING REIM noted the alternative sectors has been proven to be useful for both increasing exposure to traditional asset characteristics and achieving diversification within property portfolios as pension funds increase their weightings.

If funds were to increase their allocations to real estate by as little as 1%, Stewart said, it would have a significant impact on the market.

Average pension fund weighting to commercial property in the UK is around 7-8% at present, implying there is an additional £25bn (€35.5bn) in assets available, for each 1% of extra real estate exposure.

This is a significant amount when compared to the capital value of the IPD universe, which stood at less than £200bn (€284bn) in 2006, suggested Stewart.

"£25bn might only be six months' turnover in the market at recent transactional levels, but we are talking about an extra £25bn," Stewart said.

"I am not saying the traditional [pensions] market couldn't accommodate it, but in essence if the entire pension fund business increased allocations by 1%, it would represent about a quarter of the existing IPD universe."

Alternative sectors might well have a role to play in satisfying the level of demand that would arise from such a growth in allocation.

Investors seeking to gain sensitivity to the wider economic cycle, as provided by conventional retail, industrial and office sectors, could look at hotels, for example.
Stewart also argues London hotels could, in theory, be used as a proxy for central London offices.

"If you look at the occupancy rate, which will obviously determine the revenue of the hotel, and you look at the London vacancy rate data, there appear to be some parallels there."

Other sectors also offer access to performance characteristics which appear unique and separate from those influencing mainstream property - enabling investors to achieve diversity in their portfolios, according to ING REIM.

A major driver of the healthcare sector, for example, is longevity of life and is therefore unlikely to be subject to the vagaries of short-term economic cycle as is the case with mainstream property.

"Alternatives are a huge potential spectrum and there might be things around that we haven't considered yet," Stewart said.

"At a very basic level, you need to make a distinction between those sectors that are driven by the same factor - GDP growth - and those where you are getting exposure to something completely different, which could be food prices, forestry prices or long-term demographic factors - these are not going to fluctuate in line with the economic cycle," he added.

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