In Italy real estate is out of favour among institutional investors. The older-established funds are reducing their allocations and the new-style funds have limited opportunities to invest in property. Christine Senior reports

Italy has three types of pension funds: pre-existing funds that date from before the 1993 pensions legislation; cassa, also long established for self-employed professionals such as doctors, lawyers and journalists; and the more recently established contractual funds.

The pre-existing funds have historically been well disposed to real estate as an asset class, and had high allocations to the extent of 25% or more. These funds could be hybrid schemes, defined benefit (DB) or defined contribution (DC), but it is the DB and hybrid schemes that have been most heavily invested in property. Recently these high allocations have been gradually reducing. As the funds are now closed to new members their age profile is gradually maturing, so real estate does not suit their need for more liquidity to pay pensions.

"To some extent I would say the trend is first to reduce direct investment in real estate while increasing indirect investment into the asset class," says Gianluca Muzzi, co-head of RREEF's Italian business. "Second, not having an internal specific asset management capability they obviously have to rely on more active asset management, therefore they are outsourcing the asset management, if not the ownership, of their real estate portfolios. This is to increase the yield of this portfolio in order to meet their requirements and pension payments of their employees."

Muzzi points to two recent transactions, both from pension funds of banks, where real estate portfolios have been sold off in order to raise cash. Fondo Pensione Comit, whose bank sponsor was merged with Bank Intesa, sold off its €1.1bn real estate portfolio two years ago; and Fondo Pensione San Paolo, again after a merger with Bank Intesa, sold off its €200m real estate portfolio.

These types of funds have historically invested directly in property in Italy, with a preference for both residential and offices.

The cassa for the self-employed have historically invested heavily in real estate. Going back 20 years or more it was compulsory for them to invest in real estate, says Piero Marchettino, a partner at Adelaide Consulting. "There was an obligation to invest up to 40% of each year's investment in real estate. This obligation remained until the beginning of the 1990s."

These funds, which are still open to new members, are not constrained in their ability to invest in property. Armando Piccinno, an associate with Mercer in Milan says the scale of exposure to real estate varies according to the fund.

"For the cassa for self-employed the situation is quite mixed, with direct and domestic real estate investment present in the vast majority of cassa with quite important exposure in some cases," he says. "We have also seen, especially the ones with the highest concentration, that they have started to consider a gradual reduction."

Contractual funds on the other hand are not permitted to invest directly in real estate, only through funds, and their fund investments are limited to 20% of their total portfolio with a further limit on concentration so they cannot hold more than 25% of a closed property fund.

Within those restrictions no clear appetite for property is evident from the contractual funds. Piccinno has seen little interest in property funds. "It's probably due to current market conditions," he says. "We didn't see any strong signal to increase or decrease investment in property funds."

There have been calls to relax the restrictive rules on investments for these funds. Discussions were fairly well advanced by the end of last year, but the change of government put back plans for reform. Hopes are high that new discussions will take place next year involving Assoprevidenza (the Association of Pensions Funds), the Banking Association, the regulatory authority Covip and the ministry of finance.

"At Assoprevidenza where I am on the board we will try to restart a discussion at the beginning of next year on investment and the future of new pension funds," says Michael Atzwanger, managing director of PensPlan. "We hope that by the end of next year we will have new guidelines."

More opportunities are arising for pension funds to invest in domestic housing. Although there is a strong tradition of owner occupation in Italy, initiatives from local and regional banks, the Cassa depositi e prestiti and foundations, are backing projects for social housing both for the poor and the middle classes, which could be of interest to pension funds looking for real estate investment opportunities.

"What is missing in Italy is real estate for rent for the middle class," says Atzwanger. "Young couples need housing at a low price to rent and after 10 years they can save, then they can buy. This social housing is on the one hand for the poor and on the other for real estate for the middle class. Casse depositi e prestiti (savings and loans institutions) and foundations will provide these kinds of solutions and pension funds can be co-investors in this kind of initiative."

Additionally, there is a need for pension funds to diversify more internationally to remove some of the risk embedded in the system, says Atzwanger.

"The first-pillar pension is more or less linked to the Italian economy," he says. "By investing in the second pillar too much in the Italian economy the risk is if the economy goes bad you have a bad first pillar and a bad second pillar. There is a strong need to diversify into foreign economies and real estate is a first step in this direction. We have to diversity into European if not worldwide real estate."

For the moment, there is no great desire to invest in real estate. Fonchim, the pension fund for the chemicals industry, has no exposure to real estate at present but would like to invest when the time is right.

Director of the fund, Andrea Girardelli says there are two reasons for their policy. "First it was a problem of liquidity, and second, when we started having the money to invest in real estate the price of the real estate was too high. Now, we still think, is not the moment. I don't know when the right moment will come - it might be in one or two years."