The shift away from listed points to a variation of views regarding real estate's role in the portfolio, as Shayla Walmsley reports

Two notable trends have emerged recently within the Dutch pension fund community. The first is a broad shift away from listed real estate towards non-listed funds. The second is a divergence of views over how to make real estate perform within a scheme's overall portfolio.

The unlisted bias has long been in the offing. In 2007 De Eendragt Pensioen, a paper-and-packaging pension fund-turned-insurance firm, announced a move to sell off its listed real estate, with the intention of reallocating the capital raised to non-listed.

"Listed was a proxy," says De Eendragt Pensioen CEO Philip Menco. "With a lot of liquidity and prices increasing, it was an opportunity to get rid of all our listed property at once." Prices have now fallen "severely". He adds: "We still have something left and we'll sell it when it's appropriate, but we're not willing to sell at any price."

What is currently scuppering pension funds' plans to sell is a lack of buyers. It isn't just pension funds that are waiting on the eventual contours of a post-recession market; the market itself - save a few opportunistic investors - has gone into abeyance.

It makes sense that the shift away from listed would benefit non-listed funds rather than signalling a return to direct investment. Of course, direct offers a hedge against inflation and a diversifier, and large pension funds have continued to invest in it to some extent, even if only via pooling arrangements with other pension funds. But if you invest directly, you need money and you need in-house management capability.

Unilever's Dutch pension fund, which allocates 20% to real estate, plans to sell off its exclusively domestic direct property portfolio in favour of unlisted global funds. The inverse ratio of management expertise to market size is one reason cited for the move.

INREV CEO Lisette van Doorn argues that the current penchant for unlisted real estate is attributable to the fact that unlisted real estate better reflects the profile of direct real estate. "Liquid returns have been hit hard, and investors have had to consider whether listed real estate is real estate or equity. They want a traditional asset class with a real return," she says.

Where there is investment, it is in sub-sectors that pension funds perceive as less cyclical, such as retail. Menco, for instance, is optimistic about "good-quality shops in the best spots because they are much less cyclical. We will stick to retail."

A trend you might expect to see among Dutch pension schemes investing in real estate - as elsewhere - is more cautious geographical diversification. It makes sense that, with a new focus on avoiding or at best mitigating risk, pension funds would be more likely to invest in, say, mature European retail than in a government backed infrastructure project in a frontier market.

Patrick Kanters, managing director for global real estate at APG, points out that APG's geographical allocation strategy is a long-term one, and he says it will continue to allocate money to Asia as opportunities emerge there. "It depends on the right opportunities being there, including partnerships with like-minded operators. We have less need to go into high-risk areas and immature markets because there are many opportunities in more mature markets such as Japan, Hong Kong and Singapore." Although APG has some exposure to the Chinese market, it has less in less mature markets such as the Philippines and Vietnam.

Globally, APG relies on regional offices - such as the Hong Kong office opened two years ago - and in partnerships. "Teaming up with partners is a global thing for us and we'll continue to invest via partnerships and clubs," Kanters says. Dutch property makes up just 15% of APG's overall real estate portfolio.

In any case, if the market has effectively been left to opportunistic investors, this group does not necessarily exclude pension funds. One, the €22bn Pensioenfonds van de Metalektro (PME) announced plans in November last year to expand its 8% allocation to global opportunistic indirect investment. Since then, little progress has been made on the plan and no new commitments, but spokeswoman Gerda Smits maintains that the scheme's spirit is still willing.

She points out that the pension scheme's investment partners call for capital when they see opportunities in the market - and there are always chances in the market. The current repricing means that there will be buying opportunities; deleveraging means that there might be forced sellers; the rate of urbanisation in developing countries is still high. GDP growth is still positive there, albeit more moderate."

Yet despite the exceptions of APG and PME,

Reinoud van den Broek, recently appointed managing director of Hewitt associates in theNetherlands, suggests that the "slight tendency" for pension funds to move out of real estate funds - or even to trade their global preference for a European one - is almost beside the point; they are unlikely to invest in it all.

"It's quite logical if you think about it," he says. "In the retail space, shops in high streets are still encountering very difficult times. I don't think that's bottomed out yet and I don't think Dutch pension funds see that as an opportunity right now. Even with office buildings, here in the Netherlands we're still expecting unemployment to rise and the construction industry is expecting 2010 to be the worst year, with around 10% of the sector workforce laid off.

"I don't see now as a good moment for pension funds to invest in real estate when I can only see vacancies in both sectors rising in the short term."

The thing about property is that it delivers in the long term. "With the financial crisis, all asset classes have been moving more or less in sync," says Kanters. "Although the diversification benefits of real estate have seemed absent or at best minimal, we still believe that it has unique benefits in a long-term portfolio. Among them are its excellent characteristics in terms of hedging liabilities and inflation. There has been no change in our view on that. What has changed in funds has been the use of leverage and the amount of leverage involved."

It would be a mistake to see Dutch pension funds making decisions on real estate in a regulatory vacuum. Van den Broek points to a dramatic fall in solvency levels since the beginning of the economic crisis, with an average of 100% but a few falling below 80% solvency against a regulatory requirement for a least 105%.

He points out that if pension funds deleveraged now, for example by buying more bonds, they would be sitting ducks when interest rates began to rise.

"With most funds at around 100% solvency, you're not seeing a great deal of investment activity," he says. "You and I may agree that the real estate market, for example, will bottom out and that the prospects are pretty good. But does that mean it's possible for a Dutch pension fund with solvency at below 100% to increase its allocation to real estate? I don't believe it is because it would be increasing its risk.

"So what you see at the moment in the Netherlands is that most pension funds are waiting: they're sitting on their portfolios and they're in constant dialogue with the Dutch central bank. They're trying to avoid a situation in which they are forced to deleverage because they believe that once the market starts to go north again and once the interest rate goes north again, there'll be a recovery."

The upshot is that pension funds will continue to be cautious about increasing allocations to their riskier assets, including real estate.

According to Kanters, if there has been a shift, it has been less sectoral than strategic. Now, he says, there is more emphasis on the core functions of real estate and less on benchmarks - an approach he believes vindicates APG's long-held suspicion of over-reliance on benchmarking. "In the past, investors have often focused on benchmarks and on beating them," he says. "But beating a benchmark isn't the same as understanding what real estate can do within the portfolio."

If pension funds are cautious, they are far from reluctant. PME's move to indirect and opportunistic global investment signifies not a reluctance to invest in the real estate market but the opposite, according to Smits. "The move does not imply a reduction, it merely implies a diversification over countries and styles. Real estate as such is still attractive. Actually, it is back to normality again.The craziness is out of the market: the bubble has burst. It makes more sense to invest now than, say, two years ago."

Even the cautious van den Broek sees the current slow market - and with the pension fund's reluctance to invest - as a temporary hiatus. "Ultimately, when market conditions are a bit more favourable, I believe they will start playing the game again," he says."