GLOBAL – Defined contribution (DC) pension funds that include both private and listed real estate in its property allocation will experience higher returns, research shows.
Analysis sponsored by the European Public Real Estate Association (EPRA) showed, that, over a 15-year period, a 70-30 split between private and listed investment proved beneficial.
The association said a UK pension fund that took this split saw returns of 7.5%, almost a percentage point more than a portfolio without the property shares.
Between 1998 and 2013, the 70-30 split generated a 13.6% outperformance in returns compared with non-listed funds.
This was 38.7% when looking between 2003 and 2013.
The research, carried out by consultants Consilla Capital and the Townsend Group, tracked the performance of UK non-listed funds and an international property securities fund.
Then a fund structure of a typical DC pension scheme was replicated, allowing the researchers to formulate the results.
However, the research did highlight that the inclusion of listed property into the DC fund increased volatility.
If the scheme held only private real estate investments, volatility was calculated at 6.4%.
This compared with 8.4% for the blended approach.
The director of the research, Fraser Hughes, said the results mirrored similar research conducted by Maastricht University.
“Investors who ignore the listed real estate market seriously risk underperforming those that embrace it,” he said.
The allocation to the listed sector enhances returns for schemes irrespective of property cycles and time periods, according to Alex Moss, managing director of Consilla.
“There is now a compelling body of research to show institutional investors that, by sticking to the traditional non-listed strategy, they are missing out on superior returns, as well as the benefits of liquidity and efficient pricing,” he said.
Nicholas Cooper, principal with Townsend, added: “A blended portfolio can provide attractive risk-adjusted performance for investors. The diversification potential is also largely retained, especially when considering typical institutional allocations to the asset class.”
