Asian pension funds regard the US and UK as their top destinations for overseas real estate investments, according to a survey by Asia Pacific Real Estate Association (APREA).

The US and UK were followed in preference by Europe, Australia and Asia. Two-thirds of those surveyed expect international real estate to become an “increasingly important” asset class for their portfolios.

APREA surveyed pension funds in seven Asian countries with a total of $800bn in assets under management, found that many prefer to gain exposure through unlisted assets.

Domestic REITs were second in preference as a way of investing in real estate, followed by unlisted real estate funds. International REITs and senior debt ranked third and fourth respectively.

Graeme Newell, professor at the University of Western Sydney, commissioned by APREA to conduct the survey, said, respondents expect their investments in listed real estate to remain stable.

Half of pension funds surveyed regarded REITs as part of their real estate portfolio, with the other half considering it an equity investment. On real estate debt, around two-thirds regarded it as a fixed-income play.

Newell, who oversaw a similar survey – The Significance of Real Estate in Pension Funds in 2010 – said sentiment among Asian pension funds in real estate investments has shifted from “capturing the mood” to “capturing the momentum.”

With an increased level of knowledge in the asset class, a key difference between the two surveys, Newell said: “Asian pension funds are now developing strategies and expanding their real estate portfolios.”

In 2010, the inadequate level of understanding of the asset class was seen as a major impediment to making real estate decisions. APREA has since found an increased use of a diverse range of real estate products, along with a shift in focus towards the international market.

Pension funds’ top reasons for investing in real estate include stable income stream, portfolio diversification, lowered risk and a hedge against inflation. Newell said Asia’s large pension funds prefer club deals, joint ventures and strategic partnerships.

Challenges identified by the pension funds in the survey include the need for more information and transparency, acceptance of real estate as a major asset class within their domestic pension system and requirements to increase levels of expertise.

“Clearly for the large pension fund, a key concern for them in the selection of an external manager was alignment of interest, control and also the team’s internal resources and expertise to be able to manage the portfolio,” says Newell.

As international mandates from pension funds and sovereign wealth funds rise, competition for assets is expected to intensify.

Newell adds that another group of investors who will add to the competition are insurance companies. In China, insurance companies were recently allowed to invest in commercial real estate internationally.

“That market is about $1.2trn and even if they put 5% to real estate, that is $60bn,” he said.