Europe’s commercial real estate sector stands to benefit from increased allocations from pension funds. That was the main message from this year’s annual EPRA conference, held in London this week.
Speaking on a ‘Secure Future’ panel, Create Research chief executive Amin Rajan said with the “days of double-digit returns for pension funds gone”, he expected an increase in their allocations to real estate to around 12% in the near future.
Rajan said: “Asset allocations are changing.”
REITs – very much the talk of the corridors at this year’s conference – were ”seeing rising allocations”, he told delegates, who had earlier heard how more institutional capital was boosting the sector. “The liquidity they offer is the main attraction.”
The vehicle – which has had success in both Ireland and Spain this year – also offers smaller pension funds without in-house expertise an entry point to the commercial real estate sector, Rajan said.
“Outsourcing is happening and that serves the need of small pension funds,” he said. “Real estate is generally seen as a good asset class with regular cashflow, yield and protection against inflation.”
NAPF chief executive Joanne Segars, who joined Rajan on the panel, told delegates that pension funds were now more diversified but still had core needs. Real assets, including infrastructure, offer pension funds liability-matching returns she said. “That’s what they’re all focused on,” Segars said.
There is, she added, no “blanket approach” to commercial real estate asset classes. “It’s more sophisticated than that – the concept of traditional real estate asset classes is breaking down.”
Europe’s €145bn listed commercial real estate sector – tipped to take 18% of the global index by the end of next year – should be able to attract Asian capital, said panel moderator and Internos chairman, Jos Short.
Japan’s moves towards real estate were also on delegates’ radars, with the expectation that an allocation to the sector by the country’s state pension fund could eclipse that of Norway’s oil fund.
Although there was plenty of room for optimism at this year’s conference, caution was urged by Great Portland Estates chief executive, Toby Courtauld, with leverage levels a potential risk.
“This is still a property cycle,” Courtauld said, adding that gearing could still pose a threat to the listed sector.
Other potential issues facing the sector – such a technology – were also discussed. An increase in the amount of IPOs – most recently between French REIT Klépierre and Dutch retail specialist Corio – was also raised.
Speaking on EPRA’s investor sentiment panel, APG global real estate managing director Patrick Kanters said the Corio merger was a “no-brainer”, with the opportunity to combine expertise and skills in retail an obvious positive.
Courtauld remained positive on prospects for the property sector, saying that there was still a ”rental story” to be told following recent yield compression. The panel predicted returns to range from 6% to 12% in the coming year.