The first European Institutional Real Estate Survey (EIRES) has been conducted by IPE with support from Invesco Real Estate

The first European Institutional Real Estate Survey (EIRES) conducted by IPE and supported by Invesco Real Estate has been completed, covering 83 pension funds with more than €100bn in property investments and total assets of €1.29trn.

The survey offers a snapshot of the institutional investor market in Europe. It shows that pension funds are more cautious than ever about where they invest, how they invest, and whom they invest with. Current preoccupations can be summed up as: retreat, retrench – and keep a close eye on both managers and assets.

As a rule, domestic investment still dominates portfolios, and the closer the market is to home, the more likely it is to be managed directly. Of the €86bn in domestic investments, €73.4bn is invested directly by 47 institutions, compared with €10.5bn in funds (excluding fund of funds) by 42 schemes.

One reason for this is the widespread concern among institutional investors about control over assets (and risk). WPV, the German auditors’ pension scheme, for example, is including direct investments in its portfolio for the first time in a bid to mitigate what it sees as the lack of control inherent in pooled funds.

The correlation between market proximity and appetite for direct investment also explains the smaller, but still significant, gap between direct and fund investment in non-domestic European real estate. Direct investments in non-domestic European markets account for 51.2% (€15.4bn) of the total regional allocation, compared with 27.9% (€8.4bn) for funds.

What is interesting here is that relatively few institutions – nine – invest directly but the average investment is significant (€1.7bn), accounting for an aggregate €15.4bn. In contrast, 38 pension funds have invested €8.4bn in indirect funds, excluding fund of funds, with an average investment of €221m.

Fewer than 4% of investors surveyed manage non-European portfolios internally – most likely a reflection of limits on internal capacity for all except the largest investors. Only four of 37 pension schemes have invested directly in US real estate, for example, compared with 20 investing in funds, but they have collectively invested €10bn, compared with €4.1bn for the fund group. When it comes to average investment, the direct investors average €2.5bn compared with €207m for funds.

Yet the appetite for overseas real estate remains strong. Although the amount pension funds have invested domestically is nearly triple that invested in US real estate (€86bn compared with €23.5bn), the gap between average investments is noticeably small (€1.4bn domestic, €1.3bn in US real estate).

This suggests a certain level of confidence on the part of investors in US real estate, even if there are relatively few of them. (The aggregate amount, for example, is smaller than the €30.1bn invested in non-domestic European real estate.) Geography correlates closely with the investment style adopted by the investors polled. Core is still king, with domestic investments from 47 schemes accounting for 91% of the overall regional allocation, compared with 5.5% for core-plus, 2.5% for value-add and 0.7% for opportunistic. Despite continued overwhelming preference for core in domestic markets, pension funds are willing to move somewhat up the risk curve outside their home region. When it comes to non-domestic European markets, desire for returns is driving a slight shift, with value-add investments making up 11.3% of the total. Likewise, investments in the US market, where core accounts for 76% and value-add 15.7%, and to a greater degree Asia, where core accounts for 61.2% and value-add 26.5%.

Limits on listed
Listed real estate has limited appeal, with most investors using it to access property markets primarily for diversification. Listed accounts for 19.4% of the European regional total, compared with indirect funds’ 27.9%, and the average investment in domestic listed real estate is €206m, against a total value of listed domestic investments of €

The size of the scheme is a factor in its appetite for listed. Dutch pension fund manager APG, for example, splits its real estate portfolio into non-listed and liquidity-providing listed. German pension scheme BVK, likewise, plans to invest at least part of its €7.5bn real estate portfolio in REITs to diversify risk and increase liquidity, as well as to access otherwise unavailable niche asset sub-classes.

Not least because of the US’s significant REIT market, US listed has proven to have greater traction among a small number (five) of European pension funds. The average investment in US listed is €1.8bn, with a total value of €9bn. Dutch pension fund manager PGGM, for example, has allocated 39% of its real estate portfolio to North American markets in a quest for liquidity since the US makes up around half of the listed market.

Asian listed has yet more traction – and marginally more investors among those surveyed. Compared with indirect funds, it has fewer investors (seven, compared with 13) but still more than the four pension schemes investing directly. Yet the aggregate value of listed investments, at €3.1bn, is significantly higher than that for funds (€1.7bn), although significantly below direct investments (€4.4bn).

Managers and consultants
Control remains a driver for many pension funds across Europe, partly because of regulation – in Germany and the Netherlands, for example – and characterised by close scrutiny of both assets and the external managers hired to manage them.

But what makes a good manager? The number of factors identified as important or very import on a scale of 1 to 5 indicates what a complex business choosing a manager can be.

At least 50% of 72 respondents identified performance, clarity of the investment process and risk control as priority criteria in the selection of new managers.

Fee levels and transparency continue to exercise investors. More than 40% of respondents identified fees as ‘very significant’; and 44% prioritised alignment of interest, a related criterion for manager selection. Those paying performance-related fees alone are in a minority. Most investors in domestic vehicles (36) pay fixed fees, with a minority (21) paying both fixed and performance fees.

The pattern is reversed outside schemes’ domestic markets with a correlation between unfamiliarity of the market and the likelihood the scheme will pay both kinds of fees. In non-domestic European markets, for example, 58% of schemes pay both, but that percentage increases to 67% for the US, 68% for Asia and 74% for other markets.

Fund investment is a consultant-mediated market, even outside markets such as the UK, where this has long been the case. With the exception of direct investment in domestic real estate, for which 58% of respondents had hired an external investment consultant during the past three years, decisions on non-domestic European (79%), US (75%) and Asian (60%) funds all warranted external advice. The lower score for Asian funds is most likely the result of few pension schemes investing in them, rather than a perception that they need less help to do so.

Little or no change
There are unlikely to be major changes in investors’ real estate allocations over the next two years, but there will be tweaks.

While most (51) pension funds aim to increase their allocation, a significant number (25) plan to decrease theirs. In both categories, most of the planned changes will be modest. By far the largest category of investors intend a change of between 0-2% (29 increase, 15 decrease); only nine intend a change of more than 5%.

Although the average real estate allocation among schemes polled is 14.2%, it belies significant variations, particularly between investors from different markets. One perhaps surprising finding, given the paucity of potential returns in government bonds, is that pension funds that may have been expected to increase their allocations have effectively placed a moratorium on expansion.

Among Austrian schemes, for example, a 0.5% decrease in allocations to 3.5% across 2012 suggests it is going in the wrong direction. The €3bn Pensionskasse APK has called a (possibly temporary) halt at 3% of the overall portfolio. Meanwhile, Dutch manager CSM Pension Funds has switched 5% of its real estate allocation to emerging market equities as a result of concerns about concentration risk.

The full report is available at