As transactional data has almost entirely dried up, the true market value of real estate is shrouded in uncertainty. Richard Lowe speaks to three pension funds about what this means for their existing portfolios and investment strategies

Michael Nielsen

Head of real estate
Total assets: DKK300bn (€40bn)
Real estate allocation: Undefined (approximately 5%)

Mchael Nielsen, head of real estate at Denmark's largest pension fund, ATP, admits that the "general feeling today is that many valuations do not reflect the real market".
The problem, of course, is partly due to the lack of transactional data in various markets and sectors, which means valuers are without the necessary comparables to make appraisals with a high degree of confidence.

Nielsen wishes he had a solution to the situation, but admits he does not. Instead, ATP is focusing on scrutinising its current portfolio of real estate funds by paying close attention to the timing of fund valuations, which particular parties have carried out the valuations and on what basis they have been calculated.

Fortunately, for long-term investors like ATP, uncertainty surrounding capital values is only a problem when it comes to buying and selling assets. For the most part, the income generated by underlying properties is more important than capital value movements in the long term.

"We know that values will go up and down. It is more in the acquisition and disposal process that it could be a problem," Nielsen says. "We also have a lot of focus on how the underlying properties are performing: what is the vacancy, what is the cash flow behind the properties?"

Alan Steele
Hounslow Pension Fund

Total assets: £461m (€528m)
Real estate allocation:  6% (target 8%)

The real estate investments of the London Borough of Hounslow Pension Fund (LBH) are located exclusively in its domestic market. Given the significant correction in the UK over the past 12-18 months, it can expected that such a portfolio will have lost market value.

Speaking in December 2008, Alan Steele, adviser to the fund and former director of finance, said a 10-15% reduction in the value of the portfolio had been forecast for the end of the year.

However, Steele echoes sentiments made by Nielsen at ATP, suggesting that property investments for LBH have always been about generating long-term rental income from a "steady" portfolio of assets, not trading buildings every six months to benefit from capital value appreciation.

Steele is more concerned about ensuring buildings continue to be let and maintain a regular income. This is why the "quality" of individual assets is of paramount importance, as well as long-term considerations.

A real estate holding in Kettering, Northamptonshire, for example, is tenanted and is also expected to benefit over time from the redevelopment of the local area. "These are the types of property you are always looking for and holding," he says. And LBH is potentially in the market for further acquisitions in the UK. "The future still looks bright," Steele says positively.

Edwin Meysmans
KBC Pensioenfonds

Managing Director
Total assets: €990m
Real estate allocation:  10%

It is well known that non-listed real estate valuations lag those of the listed property sector, and the latter is widely considered to be a leading indicator of the former. But while Edwin Meysmans, managing director at the pension fund for the Belgian banking and insurance group KBC, admits that non-listed valuations calculated for the most recent quarter are probably higher than today's market value, he still believes they are more representative than the steep discounts shown in listed real estate.

Real estate valuers will have to take into account what is happening in the public markets and the deteriorating global economic outlook. Meysmans believes: "It is still more realistic to see what is happening [in non-listed real estate] valuations than the totally unrealistic things that have been happening in the listed markets."

In any case, income generation is more important than valuations, according to Meysmans. "We are in here for the longer term," he says. "The valuation of the buildings is one thing. More important, I think, are the tenants… is the rent being paid?
"As long as income streams remain more or less the same, the valuation of the building is not that important."