GLOBAL - Australian investors are planning to increase their allocation to global non-listed property by as much as 34% in the next two years as they grapple with supply constraints in the local market, according to a new report.

Russell Investments, the Asian Association for Investors in Non-listed Real Estate Vehicles and the Australian Institute of Superannuation Trustees (AIST) conducted the research to gauge how Australian institutional investors view the opportunities and challenges associated with offshore real estate.

Superannuation funds with more than AUD360bn (€275bn) in assets under management participated in the inaugural survey.

Australian institutions currently allocate 9.7% of their investment portfolios to property, largely Australia-focused, but they are intending to increase this to 10.5% in two years, the survey showed.

When this increased property allocation is combined with the overall pool of quickly growing superannuation capital, the survey suggests that as much as AUD40bn in new capital could be targeted for real estate in the next two years, a substantial sum for the circa AUD200bn Australian prime property market.

Martin Lamb, director of Asia Pacific real estate at Russell Investments, told Investment & Pensions Asia: "While Australian institutional investors have long discussed the need to capture global property opportunities, it seems a definite move offshore is now underway."

The research shows institutions are planning to increase the percentage of their property portfolios allocated to offshore investment from 2.3% to 3.2% in two years, a 34% increase.

Many said they were planning overseas due diligence and said 2012 could be a watershed year.

AIST chief executive Fiona Reynolds said the study was particularly timely given the debate about the asset allocation of Australian superannuation funds sparked by recent global share market volatility.

"International property will be increasingly on the radar of those funds looking for greater diversification," she said.

Diversification was the overwhelming reason why investors were looking offshore, with 71.8% of investors naming it as a motivation.

Lamb said: "Recent equity market instability has prompted investors to seek alternatives that reduce overall portfolio volatility, and non-listed property has always been known for its low correlation with traditional asset classes."

Even as institutions are beginning to embrace offshore property investing, there are many concerns to address.

Reynolds said: "Over half of respondents (56.4%) named lack of knowledge of offshore property as a challenge and suggested this could be improved by better education supported by industry groups, consultants and fund managers."

Foreign tax drag was also a deterrent for 43.6% of investors, with many particularly cautious about the US.

They suggested the industry could do a better job of explaining tax-efficient investment structures.

With trustee due diligence in the spotlight recently, investors are also worried they lack the necessary internal resources to manage global real estate allocations, with 41% naming it as a concern.

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