UK - The total volume of capital invested in real estate by UK institutional investors is set to grow by 20% over the next three years as pension funds increase their allocations to the asset class and move out of underweight positions, according to new a survey.

The European Association for Investors in Non-listed Real Estate Vehicles (INREV), in conjunction with the Investment Property Forum (IPF), surveyed UK pension funds, insurance company life funds and charities, and found they planned to increase their investments from £80bn (€90bn) to £97bn.

Part of the growth will come from UK institutions moving their real estate exposures back up to long-term strategic allocation levels, which INREV estimates are currently underweight by approximately £9bn.

Pension funds in the UK also expect to increase their future allocations to real estate by 0.7 percentage points, leading to a possible average real estate allocation of 7.9%.

The latter trend applies only to pension funds, as life providers anticipate they will have a lower exposure to property in the future - continuing the downward trend established in the middle of the last decade.
The European non-listed real estate funds sector, which INREV represents, stands to benefit from this growth in investment from UK institutional investors, although not disproportionately versus direct investment.

The volume of UK institutional capital invested in non-listed funds is expected to increase from £23bn to £28bn, although this will remain a fairly constant proportion of total real estate assets.

"Pension funds' exposure to real estate is currently below targets.  Now they are expected to grow to their strategic allocation targets and non-domestic, and therefore non-listed, is likely to be one of the significant beneficiaries of this," said Lonneke Löwik, director of research and market information at INREV.

The INREV UK Investor Universe report showed direct investment was still the preferred route for UK pension funds investing in their domestic real estate market, while non-listed funds accounted for only 22% of all UK investments.
Outside the UK, however, non-listed funds dominate as the main investment method as they account for three-quarters of total capital invested in real estate by UK institutional investors but outside their home borders.

This reflects the high proportion in the UK investor universe of life funds and large pension funds  - assets under management of more than £5bn - as all invest most of their capital directly.

INREV found that some of the large pension funds were "fundamentally opposed" to investing in non-listed real estate funds for three principal reasons: returns were not perceived to be in line with the vehicles' risk and illiquidity; the nature of returns were different to that of direct core UK real estate; a lack of control over the vehicles.

The large pension funds' exposure to non-listed funds was disproportionately low compared with life funds.

INREV said the latter used funds to gain access to specialist sectors and markets where they lack the expertise to invest directly, but large pension funds often prefer to do this through joint ventures which they consider to offer greater control, influence and alignment of interest.

In contrast to their larger counterparts, small and medium-sized pension funds dominated the non-listed funds market, often investing in diversified core, or balanced, vehicles.

INREV found a small but growing proportion of these pension funds were pursuing more adventurous strategies, made possible by non-listed vehicles, where the objective was either higher returns or superior diversification for their multi-asset portfolios.