There is no widespread overhaul of asset allocation among Italian institutions. But some are looking to increase exposure, writes Carlo Svaluto Moreolo 

Domestic and foreign real estate remains a niche asset class for the majority of Italian pension funds. Due to structural factors, rather than cyclical ones, it is hard to see a significant shift in asset allocation. 

However, real estate remains a staple for Italian insurers and sub-sections of the pension fund community. Isolated groups of investors are restructuring their allocations, potentially increasing liquidity in the market. 

Furthermore, recent regulatory changes potentially facilitate investment in the sector by Italian pension funds. In recent years, a handful of investors have implemented first-time allocations, primarily, but not exclusively, in the domestic market. The picture is not as bleak as it appears at first sight.

To understand Italian pensions, it is helpful to divide the market into five broad categories of pension fund investors. Each has unique characteristics and a different attitude towards real estate investment. 

The most exposed to the asset class are casse di previdenza, first-pillar pension funds for self-employed professionals, such as doctors, lawyers or engineers. At the end of 2015 they held over €75bn of assets and invested almost 9% in direct real estate, plus 15% in real estate funds.

There are then four types of occupational second-pillar pension funds: ‘fondi negoziali’, pre-existing pension funds, open pension funds and piani individuali pensionistici (PIPs).

Fondi negoziali, or ‘closed’ pension funds, are the largest and fastest growing group overall. They consist of trade union-backed, multi-employer-funded defined-contribution (DC) arrangements. They were created in the 1990s to address the country’s lack of pension coverage. Out of the less than 40 pension funds in this category, which hold just over €45bn, only one has invested in real estate. 

Pre-existing pension funds are those that predated the introduction of fondi negoziali. At the end of 2015 they had invested 8.5% of their AUM of around €30bn in direct real estate and 4.7% in real estate funds.

Open pension funds are collective DC arrangements, not linked to a single employer and mainly sponsored by insurers or banks. Their allocation to real estate at the end of 2016 was negligible. The same goes for PIPs – individual pension plans mainly marketed by banks. 

A sixth separate entity outside this classification is the country’s public pension fund, Istituto Nazionale per la Previdenza Sociale (INPS). The fund also has a large portfolio of direct holdings but very little freedom to invest further or restructure the portfolio.  

By far the most experienced investors are casse di previdenza. These funds carry out first-pillar functions and were public entities until they were privatised more than 20 years ago. 

From a regulatory point of view they have almost complete freedom over their asset allocation. Traditionally, casse di previdenza have also allocated large parts of their portfolios to real estate, investing mainly residential and offices. 

However, their solvency requirements have become more stringent since 2012, following the overhaul of the pension system carried out by the government of Mario Monti. 

In recent years, lawmakers have been discussing a revision of the investment framework for casse di previdenza, which would introduce limits to exposures to different asset classes. In an initial draft of the law, real estate was capped at 20%, but was later increased to 30%. 

The law was initially drafted in response to concerns about alleged cases of excessive or reckless risk-taking by a number of casse di previdenza, and following a review of the investment framework for occupational pension funds. Discussions on the law stalled late last year when the Council of State, a consultative body judging on public administration law, expressed doubts about its legality.

The proposed cap to real estate exposure was met with strong concerns by casse di previdenza. Many of them do not meet the requirement, as often more than 30% of portfolios are invested in the asset class. According to the draft law, investors would be given five years to scale back their exposure. But being forced to divest, even over a relatively long period of time, is always hard to swallow. 

“In recent years, lawmakers have been discussing a revision of the investment framework for casse di previdenza, which would introduce limits to exposures to different asset classes. In an initial draft of the law, real estate was capped at 20%, but was later increased to 30%”

The measure is bound to have an impact on the market, although it is difficult to establish how negative it will be. The extent to which other types of pension funds enter the market and support demand for assets is unclear.

Inarcassa, the first-pillar pension fund for self-employed engineers and architects, has set a 17% target for real estate as part of its strategic asset allocation for 2017. The target represents an increase of 1.5 percentage points compared with the current asset allocation of Inarcassa’s €8.8bn portfolio. The fund made its first overseas investment in 2014, allocating €85bn in non-listed funds managed by LaSalle Investment Management. 

Inarcassa is also active in infrastructure. Teaming up with the casse di previdenza for surveyors and industrial engineers, it formed Arpinge, a vehicle dedicated to Italian infrastructure investments. 

Alfredo Granata, Inarcassa’s CIO, has signalled that the fund aims to increase the portion of overseas real estate expenses. It is also keen to set up further collective infrastructure investment vehicles.

There is no shortage of other examples of casse di previdenza investing in real estate and infrastructure. However, the largest investors are diversifying further. Enpam, Italy’s largest pension fund, is focusing on healthcare infrastructure. The €19bn investor, which provides pensions to Italy’s general practitioners, invests 31% in real estate and has committed €80m to assisted-living residential-health facilities. 

Beyond the casse di previdenza sector, investors are reluctant to move. In particular, second-pillar occupational pension funds are unlikely to increase their exposure and support demand, despite being the fastest-growing sector in terms of assets under management. 

So far, these funds have been limited by their lack of internal resources. Due to their relatively young history and a number of complex historical and structural factors, they have tended not to enter domestic or real estate markets. This is despite efforts from Covip, the pension regulator, to push schemes to become more sophisticated. Since 2012, the regulator requires scheme to develop internal investment teams. 

However, there are examples of brave investors. Eurofer, the €883m second-pillar, trade union-backed pension fund for rail workers, is the only scheme of its kind to have built a real estate portfolio. The scheme built an in-house team with real estate investment management skills.

Eurofer’s real estate portfolio consists of a pan-European fund, with assets of about €28m. The pension scheme has placed the investment in its default fund, a balanced fund with AUM of about €850m. 

Within the fund’s strategic asset allocation, real estate falls into the alternative investment bucket. The scheme recently raised the target allocation for alternatives and, to meet the target, Eurofer decided to enter the infrastructure market. 

Last year, the scheme invested in the Macquarie European Infrastructure Fund 5, allocating €25m. This makes Eurofer the first infrastructure investor in its category. Eurofer’s real estate investment programme was carried out under the chairmanship of Osvaldo Marinig, who now chairs Fondo Pensione Priamo, the pension scheme for public transport sector employees. 

At €1.3bn pension scheme Priamo, Marinig is trying to invest €15m in private debt. But the original intention was to deploy that money in real estate. According to Marinig, the plan was shelved partly due to the prospect of oversupply in the market. If casse di previdenza were to unload their assets concurrently over the next few years, it would depress prices further and slow down the recovery of the market. 

Recently, Byblos, the pension scheme for employees of the printing and paper sector, launched a search for an alternative investment fund. The €721m scheme plans to invest €30m in a fund that targets private debt in sectors, including infrastructure and real estate debt.