The property industry is only just beginning to consider how defined contribution (DC) funds could invest in real estate, but must find ways to deliver liquid alternatives, according to the chief executive of Forum Partners.
Russell Platt said the innovation needed to allow for such investments would be exciting, but that Europe was “playing catch-up” compared with the more advanced Australian superannuation market.
Speaking at a La Française Asset Management event – less than a year after Forum and the French manager agreed a strategic partnership that saw La Française acquire a 24.9% stake – Platt identified the shift from defined benefit pension funds to DC as one of the biggest challenges facing his industry.
“People now are just beginning to turn their attention to it, and it’s not easy – particularly if you want to provide lower-volatility direct real estate and equity assets into a defined contribution plan,” he said.
The co-founder of Forum Partners said Australia was “probably as far advanced as anyone” in addressing the problem.
The Australian model of Super funds is largely DC and active in both the real estate and infrastructure market.
Platt said there were ways of tackling the problems that stemmed from requirements to revalue property holdings on a daily basis, and also that the use of real estate securities could offer ways of allowing for limited liquidity required by some DC investors.
“The Australians have come to a very common-sense view,” he added. “Even if we have to allow for daily liquidity and portfolio changes among our underlying superannuants, not everyone is going to move from one side of the ship to the other at the same time.”
He said many investors would instead take on a limited amount of implied liquidity and either create an internal trading market or invest instead in real estate securities.
“That kind of approach, certainly from the largest players in the industry, is what we will see adopted more broadly,” he said.
“Australians view real estate securities not as an add-on or the icing on the cake, which is typical of perhaps Americans and Western Europeans, where REITs aren’t as entrenched. Rather they view it as the foundation of a real estate portfolio.
“The world is probably going to move more in that direction, and in that sense, again, Europe is playing catch-up.
“Finding ways to crack this, there is not going to be any single solution, but a series of product innovations. It’s probably the most exciting edge of the real estate industry, as far as I’m concerned, finding ways to deliver liquid alternatives.”
Property holdings by DC fund are not unheard of outside of the UK, and the National Employment Savings Trust has considered the use of REITs as a way of providing it access to the real estate market – both domestically and globally.