Are Italians about to go across the border?
AXA's announcement that it had raised €118m from Italian institutions for the first close of a fund targeting European office represents a significant shift for pension funds traditionally limited to major cities in their domestic market.
It was followed soon after by the establishment of a joint venture between Henderson Global Investors and Investire Immobiliaire to target Italian pension funds with overseas property in their sights, and IP Real Estate is aware of at least one other non-Italian real estate fund manager exploring potential in this area.
Even trying to target the Italian pension fund market with a cross-border proposition takes an intrepid fund manager. AXA fund manager Giorgio Pieralli said there had been a small precedent: a couple of Italian pension funds with small allocations to cross-border funds, as well as Cariplo pension fund's ownership until earlier this year of a Manhattan office block.
As fund managers and advisers increase their emphasis on the benefits of diversification through third-party funds, costs associated with managing directly owned domestic portfolios have encouraged pension fund investors towards alternative investment strategies.
Pieralli's fund, although cautious, is structured for maximum diversification. No one of its assets will exceed 15% of the total portfolio, and no one tenant may represent more than 20% of revenue. But the domestic consensus is growing over the need to move away from residential more quickly and to invest, for example, in commercial or logistics, according to Armando Piccinno, senior associate at investment consultancy Mercer.
"There's an awareness of the need to move away from residential more quickly and to invest, for example, in commercial or logistics," he said. "The question is how fast."
AXA has established a precedent, but a couple of things now need to happen for Italian pension funds to become regular investors in cross-border real estate. Getting the regulator to regulate is one of them. This year, reforms both of the 703 law governing pension fund investments and of Italian pensions regulator COVIP's operating rules for pension funds - notably the introduction of a new rule on ‘proportion' - could liberalise schemes' investment strategies. But one obstacle to date has been that Italian pension schemes have been cautious about breaking rules that do not exist - at least not yet.
"For reasons no one understands, COVIP has never set rules for investing in real estate," said Davide Cipparrone, chief executive at financial risk consultancty MangustaRisk. "In theory, pension funds have been able to invest in real estate from the beginning, but it never really happens because the rules haven't been set."
One example he gives is a mandate for MangustaRisk from Fondo Cometa to design a portfolio for what is Italy's largest pension scheme. The theoretical portfolio the consultancy came up with included real estate, but Cometa's board declined to green light it in case it embarrassed COVIP by breaching non-existent rules.
"The debate [over rules] has been going for five years," said Cipparrone. "Every year, someone says ‘It's time to change' and the discussion starts up again, even stronger. We have to pull up this layer of uncertainty. It's useless, and it's damaging pension funds."
That might be about to happen. "Maybe it will happen in the next few months," said -Cipparrone, sounding unconvinced. "Perhaps now is the right time." Then again, it might not be.
In the meantime, AXA has lost no time in launching its fund, saying it has "nothing to fear" from (putative) upcoming regulatory changes. "Funds with solid fundamentals and a commitment to transparency have nothing to fear regarding a change in regulations," said Pieralli. "We're more than comfortable that any potential change in regulations or frameworks will not impact the fund's operations."