Development of property and infrastructure portfolios continues to be hampered by a lack of solutions for pension funds. Shayla Walmsley reports

When IP Real Estate surveyed Belgian pension fund managers two years ago, almost all had reviewed, or were reviewing, the shift into listed they had made around a decade before. All had keenly felt the shock of correlation.

It seems they still do. Real estate investment trusts (REITs) still have their pension fund investors but really only via funds. If you look at the major pension-related shareholders in Belgium's largest REITs, none of them are Belgian. APG and the Norwegian oil fund, in contrast to their Belgian counterparts, are major shareholders in Befimmo, Cofinimmo and Warehouses de Pauw.

"Although lots of real estate companies are now healthier than a few years ago - they've cleaned up their balance sheets - there are still several factors to be cautious about, including tougher regulations, austerity measures, the sovereign debt crisis, and the still-tight lending market," says Greet Grauls, finance manager at Pensioenfonds Metaal.
Yet Belgian pension funds need real estate precisely because it is uncorrelated to equities or bonds. In a review last year, KBC pension fund increased its real estate allocation, now part of an inflation-hedging ‘real assets' portfolio, from 10% to 12.5%. Only 25% of the new target will be allocated to listed, compared with 90% previously.

Managing director Edwin Meysmans says real assets contribute both to the scheme's liability-driven investing (LDI) strategy and its returns. "Now everyone is coming back to core and core-plus rather than value-added," he says. "These days the return will be coming from rent, rather than capital appreciation. Rent you receive, in contrast to valuations, which are relatively subjective and can go up and down. If it means a return of [just] 6%, that's fine with me."

In some cases, the allocation is nominal, with little or no impact on overall performance. The €170m MEPs pension scheme's €10m allocation, for example, principally comprises an investment in a 10-year euro-nominated pan-European commercial real estate fund. Asked what impact this euro-zone-specific strategy would have on returns, chairman Richard Balfe points out that the size of the allocation - €20-30m, with no planned increase - meant it made little difference.

"We needed to do a bit of diversification away from equities and bonds," he says. "Diversification is a topic, but not a hot topic. The priority in the current climate, with sovereign debt write-downs and the macro situation, is staying alive."

Cautious diversification in search of returns is behind the increase in allocations to infrastructure, notably PPP projects. Belgian pension funds were among the investors that committed €163m to the DG Infra Yield energy-and-PPP fund co-sponsored by Dexia successor Belfius, which had its second closing in July.

Construction workers' scheme Pensio B calculates that it needs to allocate a third of the capital it has earmarked to real assets to infrastructure, with the rest going to core real estate. "In the UK, big pension funds look at infrastructure for regular income - they're big enough to take on a toll road or a bridge. But we're investing in onshore and offshore wind, and in the construction of public-sector buildings," says finance manager Bernard Caroyez.

The KBC scheme now has built up its infrastructure exposure by investing in four European funds. Meysmans says the pension fund will maintain this approach for the asset class. "We could possibly do a US fund, but we're much too small and much too inexperienced to do a Vietnamese fund, for example. It's difficult if you don't have people on the ground," he says.

Pensio B is following a similar path. "We're a small team and we don't have the time and resources for asset management, so instead we're looking at non-listed vehicles," says Caroyez.

The pension fund is especially interested in funds set up by pension funds with an investment management licence. "It's a good way of thinking about developing our team based on the experience larger pension funds," he adds. "We're looking to team up with other pension funds and investors that are open to the idea and have the same needs."

Yet Karel Stroobants, board member of two Belgian schemes, says that kind of partnership is unlikely to happen soon. "Even three or four smaller pension funds could put something together. But there's no evidence that it's happening," he says.

Citing his own frustrating experience of trying to pull together club deals with other Belgian pension funds, Stroobants says: "It has to change - at least among larger pension funds - but it needs a push from who knows where?"

Fund managers' meagre offerings are not helping, but pension funds' limited knowledge and reluctance to invest in what they do not understand mean that is likely to be few buyers for fund managers able to create the appropriate structures. That aversion to new structures has intensified since the Dexia bailout(s) and wider banking crises.

"The problem is that both the buy side and the sell side are lazy and incompetent," says Stroobants.

The scarcity of likely vehicles is one reason why some Belgian pension funds are considering a shift back into bricks and mortar.

Pensioenfonds Metaal started off with an indirect listed real estate allocation - like most Belgian schemes - because of its limited size. The metalworkers' scheme already has a listed allocation of just above 5% and a target direct allocation of 6% via a mandate with AXA Real Estate. Now Grauls says an increase in the scheme's size, combined with a 15-year cash flow-positive forecast, has made diversification into direct feasible.

Other Belgian pension funds never quite abandoned direct in the first place. KBC still had 10% of its portfolio directly invested when the financial crisis struck. Meysmans says he's "still looking" at a possible return to domestic direct investments.

"Originally we invested in real estate by buying buildings. We did it for 30 years and it gave us our best returns," he says.