Aon Hewitt has advised UK pension funds to consider using real estate more widely in their multi-asset portfolios.

The pension investment consultancy has made the case for looking beyond property as a simple source of diversification to an asset class that can play a number of roles.

In a new white paper, Aon said there were now more types of property strategies accessible to pension schemes than a few years ago, and that they should look beyond traditional domestic core funds.

Nick Duff, Partner at Aon Hewitt, told IPE Real Estate: “Pension funds could benefit from using real estate, infrastructure and other illiquids more extensively in their portfolios.

“In the case of real estate, we want them to think about potential roles [it can play] within different strategies as part of a wider pool of assets,” he said, moving away from simply providing “traditional diversification benefits”.

Duff added: “For example, as part of a cash-flow generating strategy or within a wider private-markets programme.

“Real estate can offer many different risk and return attributes ranging from lower-risk, inflation-linked assets where returns are primarily driven by income to higher risk, value-add and opportunistic funds which are more growth focused.”

The Aon paper, Constructing Your Property Portfolio, cites a number of new strategies, including those focusing on debt, long-term, inflation-linked cash flows, value-added and opportunistic strategies and the private-rented housing sector.

“These opportunities offer a range of attractive risk-adjusted returns and can help pension schemes navigate a world where the yield and expected return on traditional asset classes remain low compared to historical standards,” Aon said.

This week, BlackRock announced it had raised £500m (€566m) for a real assets fund designed to provide UK pension funds inflation-linked cash flows, investing in asset classes such as real estate debt and long-lease property.

Duff said: “Overall, we believe a well-diversified property portfolio across different strategies and regions – rather than just focused on UK core commercial property – will help schemes and their wider investment and funding objectives.”