POLAND - Asset managers would be unlikely to take on Polish pension funds' property portfolios even if domestic reforms were to lift restrictions on them investing in alternatives, according to Dariusz Stánko, a specialist at the Warsaw School of Economics.

Following comments made last week to IPE Real Estate by First Property chief executive Ben Habib that the Polish government needed to "get a grip" on its estate market by lifting the prohibition on pension funds investing in property, Stánko noted the downside risk to pension managers associated with failing to meet the required return in a social security system with 14m members.

"Open pension funds in Poland are much more strongly regulated than private pension funds in the UK because the Polish funds are a part of social security system, and it would create an issue with potential loss and, as a result, with the need to pay for the deficit," he said.

Stánko pointed out that pension administrators are required by law to meet any deficit if the pension funds' rate of return is below the minimum required - the minimum being either half of the industry average or the industry average minus 4 percentage points.

"It wouldn't pay for the asset managing company to take the downside risk - the incentives are not as strong as the potential costs," said Stánko.

"There is an asymmetry built in the guarantee system that also creates the phenomenon of herding."

Although he acknowledged the implicit diversification effect of real estate, he described as "rational" the prohibition on pension funds investing in property on the grounds that the Polish relisted market is still in the development phase.

"And," he added, "there is practically no liquid market for real estate investment certificates of closed-end real estate mutual funds."

As of the end of June, these funds comprised only 0.2% of pension funds' total portfolios.

Even if the prohibition were removed, Stánko said, managers would not be eager to invest indirectly through mutual funds because they do not receive asset management fees for indirectly invested assets.

Moreover, the state Treasury needs to sell bonds to finance the public debt.

"What we observe here is a strong crowding-out effect," said Stánko.

"Managers prefer to invest in less risky T-bonds, which offer quite attractive rates of return."

Increasing pension fund demand for real estate would require development of a market for closed-end real estate mutual funds and the elimination of economic disincentive to investing in them, he added.