EUROPE - Pension funds must pay more attention to risk when moving into the European commercial real estate (CRE) market, as access to debt remains limited, Hatfield Philips International (HPI) has warned.

HPI, which reacted to a survey sent to lenders, institutional fund managers and specialist funders, said it expected to see more interest from pension funds, which historically have not considered the market a stand-alone investment class.

According to the loan servicer, this is due to the fact many investors that were active in the commercial property market in Europe before the crisis decided to leave the sector, creating space for institutional investors.

However, the company said pension funds should proceed with caution, as the market remains volatile and the level of refinancing needed high.

Clarence Dixon, managing director at HPI, said: "My first reaction to the data is that the CRE world is far from out of the woods and, reluctant as I am to say it, there is still a significant degree of pain to come."

One of the major issues for investors at the moment is directly linked to the level of debt available in the CRE market.

Dixon said: "The coming year and beyond are going to be extremely fraught for both current borrowers and lenders alike.

"While the scale of the debt that needs financing is widely known, there is a general view that, in some way, everything will work out OK."

He added: "In our experience, the refinancing process is still woefully underestimated by borrowers, many of whom still expect the same experience as when the loan was first originated.

"The primary change is that commercial property now has to be owned as a working asset and not purchased in the belief that capital appreciation will outweigh any under-utilisation or failings in the management of the assets."

In spite of this warning, HPI said funding was still available in the European commercial property market, but that most lenders had modest amounts to spend.