Pan-European real estate funds are still very small compared to their US counterparts, but the sector is set to expand and close the gap eventually, investors in Milan heard on Tuesday.

Speaking at the IPE Real Estate Conference & Awards, Jeroen Reijnoudt, principal portfolio manager at MN, said the Dutch pension asset manager could consider making direct deals in Europe — and one of the main reasons was the small size of the pan-European funds market.

MN, which manages the real estate exposure of Dutch pension funds PMT and PME, is invested in a number of open-ended, pan-European real estate funds – including a residential fund, recently launched by Aberdeen Standard Investments.

“The European investment universe is very small still if we compare it to the US, with the balanced or indexed market size of €20bn; if we compare that to the US at €160-170bn, it’s easier to choose there,” Reijnoudt said during a panel discussion on investment structures.

Moderator Justin Curlow, global head of research and strategy at AXA Investment Managers–Real Assets, asked if the core open-ended space would grow to the size of the US market, or even to 10 times what is seen today. AXA IM-RA is itself one of a number of investment managers to launch pan-European real estate funds.

“Yes I think definitely that will happen,” Reijnoudt said. “If you compare the populations, there’s not that big a difference.

“But it took 40 years to build that universe in the US, so it might take similar period of time over here, with ups and downs. But the inflow into pan-European balanced funds is huge at the moment.”

Sasha Silver, managing director, head of client development at Tristan Capital Partners, said her firm had the US model in mind when it recently created its first perpetual-life real estate fund.

“We like the model for many reasons,” she said. “There are open-end funds that existed in Europe — they have different models of redemption — and we redesigned [the fund] in a way that reflects more the US model of alignment.”

Asked about expanding real estate investment internationally, Roberto Marsella, head of portfolio strategy and real estate partnerships at Generali Real Estate stressed the importance of local knowledge.

“Real estate is a local business; the more you go international, of course, the less local knowledge you have, so if you don’t have that knowledge you have to rent it,” he said.

Funds, co-investments and joint ventures were all smart ways of bridging that knowledge gap, he said.

“In some markets, we have good knowledge, because as Generali we have had an insurance presence for a long time – we have people and branches and support – but that is mostly in continental Europe.

“Outside this area what is key for us, in addition to the product, is really to find smart people who know almost every block of the city.”

Martin Towns, head of capital solutions at M&G Real Estate, said his firm was seeing a lot of larger investors seeking greater geographical diversification, and thinking long and hard about how they wanted to obtain that exposure.

“Typically with the larger investors we are finding they have a preference to invest directly into those target markets and so we are seeing this happening — working with separate account managers in the chosen jurisdiction, with someone who has a platform and a track record and capability on the ground, and or looking for partners to do co-investments with,” he said.

“So that has been a growth area of our business over the last two to three years,” said Towns.