EUROPE - More European pension funds will begin to invest in real estate debt funds, but they face a number of challenges, according to CBRE Global Investors' multi-manager business.

Alexander van Riel, head of continental Europe at CBRE Global Multi Manager, said there would be a structural shift in the real estate funds industry whereby more institutional capital was directed to mezzanine and junior debt funds as a way of gaining property exposure.

But van Riel, speaking at the annual INREV CFO Conference in Madrid, warned that real estate debt funds in the market were often "opportunistic" in nature and applied leverage onto existing leverage.

He complained that funds were structured such that fund managers stood to benefit from extra returns from leverage, while the associated risk was left with the investor.

Van Riel was previously head of ING Real Estate Select's continental European team before it was merged with CBRE Investors' multi-manager business.

As a result of the merger, CBRE Global Multi Manager has pension fund clients in both Europe and US, and van Riel told delegates in Madrid about the different emerging trends among Dutch, UK and US institutions.

He said Dutch pension funds were looking for income-producing property investments and were looking to avoid leveraged funds, which he said had shown a correlation with equity markets in recent years.

Van Riel added that UK pension funds had been disappointed with investment in continental European property funds due to high leverage used, illiquidity, valuation stability and currency risk.

He said UK pension funds were either looking to focus on their domestic property market or to circumvent continental Europe by investing globally.

US pension funds, meanwhile, were showing appetite for European real estate for the first time in years, van Riel added, but he said they were factoring in a risk premium for investing outside the US and were concerned about the state of the European economy and financial stability.

Most US pension funds' investment outside the domestic real estate market had been focused on Latin America, he added.

CBRE's multi-manager business is looking at real estate debt funds for its pension fund clients, and van Riel said many of them were now in a position to commit capital to the emerging investment space, following a period of investor education.

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