Governance is the biggest obstacle to overcome in order to encourage real estate investment by Italy's pension funds, Richard Lowe finds

Funds established before 1993, the so-called ‘pre-existing' funds, have historically invested a high proportion of their assets in direct local property holdings - sometimes as high as 50%. Times are changing, though; today's funds, according to figures from COVIP, the Italian pension fund supervisory authority, have an average allocation of 16.8% to property, of which 4.5% is invested in listed funds.
This can be explained, on the one hand, by pre-existing funds naturally looking for more liquid assets as their members near retirement. Yet, as of 2006, many also now have a legal incentive to reduce their property holdings.
The ministry of the economy and finance issued a decree in 2006 bringing the regulation of pre-existing funds in line with that of post-1993 schemes. The former will still be allowed to make direct investments, but will be limited to investing up to 20% of their assets in direct real estate and/or closed-end funds. Funds currently exceeding this percentage will be given a period of five years to conform with the new regulations (COVIP will have the power to give authorisation to a pension fund exceeding the limit and deadline in certain circumstances).
Pre-existing €1.4bn fund Fondo Pensione Gruppo Unicredito Italiano has been reducing its real estate allocation, which has been as high as 90% in the past. Today it stands at 50%. Vice-director Roberto Veronico is not concerned about the new legal requirement to reduce the figure further.
"We can own real estate 20% directly, plus 20% through mutual funds, so we can transform part of our property in funds," he says.
According to COVIP, there are no new-style pension funds investing in real estate. They suffer from regulatory constraints: they cannot invest directly; they may only invest up to 20% of their net asset value and up to 25% of a real estate fund's NAV, but this alone cannot explain their absence from the market.
Piero Marchettini, partner at Adelaide Consulting, believes that trustees will not see real estate as a suitable asset class for DC pension plans. He argues that DC schemes necessitate giving a "valuation of the share of the fund on a regular basis", something to which property investment does not easily lend itself.
Like other pension funds created after 1993, Pens Plans Plurifonds, the pension services provider of the semi-autonomous Trentino Alto Adige region, is not invested in real estate.
However, managing director Michael Atzwanger expects real estate investments to play a part in the future diversification of Italian pension funds as capital values accumulate - although not without significantly developing scheme governance first.
"Pension fund board members are, as of today, not sufficiently sophisticated," he explains.
"We are in a new system, so at this moment we are studying here in Italy how to increase the knowledge of the trustees of the pension funds in order to allow them to invest in real estate shares or companies. To do that, of course, you need good risk management."
Andrea Girardelli, director of industry-wide pension fund for chemical workers Fonchim, envisages a time when the fund is in a position to allocate 4-5% of its assets to real estate, but only "after an in-depth study to understand what it means in terms of profits, volatility and liquidity".
Some of the biggest new-style pension funds such as Fonchim, which has over €1bn of assets, today have significant amounts of capital. This has been further boosted by the recent reform of the Trattamento di Fine Rapporto (TFR). TFR is the lump sum that Italian employees get when they leave a company and/or retire and that now must guarantee a yield of 150 bps higher than 75% of the inflation rate. In theory, this means the funds are no longer restricted to liquid assets as they were in the past. Girardelli believes this development will drive investigations into "different kinds of investments".
He says: "I'm sure the first two or three funds in Italy are thinking about alternative investments, and real estate could be one of the possibilities. But we haven't considered it so far, because there weren't enough assets to do it."
If new pension funds begin investing indirectly in real estate, their options increased recently with the launch of an Italian equivalent of the REIT - the Società di Investimento Immobiliare Quotata (SIIQ).