For VBV's Günther Schiendl the economic crisis has changed the real estate landscape. No longer can it be considered to be the stable, long-term source of liquidity it once was. In addition to greater liquidity risk comes the hard lesson that the reality can be more dramatic than the worst-case scenario, as he explains to Richard Lowe

The real estate investments of VBV, Austria's largest pensionskasse, amount to approximately 5% of its €4bn in assets under management. The pension fund has previously said it had a strategic aim to raise this quota to something closer to 10%, but the global financial crisis has very much informed the way VBV will look to develop its real estate portfolio in the future. The pension fund has ultimately changed the way it perceives real estate in terms of risk.

Günther Schiendl, chief investment officer and member of the board at VBV, reveals that he has been "forced to see real estate somewhat more like equity investments, with a higher degree of price risk". He adds: "We are seeing real estate as more risky than we did pre-2008".

Schiendl attempts to explain the anomaly by saying real estate has historically been a "cash flow-oriented" investment, especially in the case of core investments that are there to provide the pension fund with a stable liquidity stream. Schiendl says the past 18 months have called into question long-held assumptions about the reliability and stability of property valuations. "I don't have that kind of assurance with the cash flows that I used to have one and a half years ago," he says.

The situation is exacerbated by the inconsistency of valuation principles employed by external fund managers. "No two real estate managers have identical valuation principles. That means that some real estate funds are priced mark-to-market and others are rather more priced to book. So the performance figures to be seen in real estate funds are somewhat difficult to compare in this kind of environment," Schiendl says.

The adoption of common valuation principles or at least greater consistency among fund managers would be helpful for investors, he says. "It is really difficult to compare performance these days if one fund is really priced mark-to-market and the other one is priced on some assumptions," says Schiendl.

In addition to price risk and difficulties around valuation principles, there is a sense that real estate can come with a greater liquidity risk than previously appreciated. "The lesson to learn from the crisis is that liquidity risk is really a material issue. We have seen so many bad things happening to us because liquidity is not there in the market or to finance certain financial products," Schiendl says.

When Schiendl last spoke to IPE Real Estate at the beginning of 2009 his attention was directed towards the liquidity difficulties experienced by large endowment funds in the US. This was largely attributable to heavy weightings on the part of US institutions to illiquid alternative investments, such as private equity and hedge funds, which experienced a liquidity crunch at the same time across the board.

VBV does not have any private equity investments, but Schiendl has taken note of the experience in the US, since the principle also applies to non-liquid investments such as non-listed real estate. When planning future real estate commitments, VBV will incorporate what Schiendl calls "explicit liquidity risk scenarios".

Another lesson learned is the sobering fact that reality can actually be more dramatic than the worst-case scenarios played out by risk models. "It definitely means seeing risk more crudely maybe in the way that losses can occur. One should really build risk analysis on those kinds of worst-case scenarios," he says.

Yet, for all the talk of greater perceptions of risk and focuses on worst-case scenarios, VBV is still committed to real estate. In fact, Schiendl believes investment opportunities in the asset class are building. He employs the oft-used English phrase of ‘once burnt, twice shy' and warns it would be wrong to retreat from property investments because of experiences in the past 18 months.

"The key issue next year will be to decide to start reinvesting or recommitting again, and the challenge is not to do that too late," he says. "The real challenge is to not throw the baby out with the bath water. I think the markets will behave in some normal way again and one needs to find traction and reorientation - after a year when everything has been turned upside down."

In terms of markets, Schiendl sees value in core European markets - where there are "interesting cap rates" - but he is yet to have come to a firm view on US real estate. VBV already has commitments to some opportunistic real estate managers and Schiendl expects to see them make some capital calls in the future.

But as a result of VBV's new perception of real estate, Schiendl says the pension fund will approach property investments with a shorter timeframe in mind, such as three to five year investment periods rather than 10.

"One of the conclusions is to see real estate somewhat more tactical in nature than it used to be. So the time horizon in real estate has become somewhat shorter, because the kind of stability we used to expect from real estate investments has not been delivered. We still see value in real estate, but generally - as in most of the markets - it seems to be that we are forced to see it with a higher degree of urgency and thus a shorter time horizon," he says.

This has added ramifications for asset allocation strategies at VBV. "It also leads us to the conclusion that real estate allocation is probably not necessarily a permanent allocation," Schiendl adds. "It is an allocation that changes as the general financial markets change, as the allocations to equities or bonds do."