GLOBAL - Pension funds will increase their allocations to real estate, focusing on prime assets and listed investments as they seek ways to anticipate global property markets, according to ING Real Estate Investment Management. ING REIM's Global Vision 2011 report said that with continuing economic recovery supporting asset prices across the board, low interest rates have increased real estate's attractiveness as a source of yield. Global research head Tim Bellman pointed to bifurcation between investors convinced that the bumpy, protracted recovery underway was taking hold and as-yet unconvinced investors worried the recovery might get knocked into reverse gear. Identifying the trend as "a new nuance" this year, Bellman said the trend cut across local authority and private sector pension funds and even sovereign wealth funds. "It is a reflection of the uncertain times we're living in and the role real estate is playing in portfolios now," he said. "If these investors have anything in common, it's probably that they see the income return characteristics as driving the attractiveness of real estate. In the short term, it's all about income return [rather than diversification]." Allocations will increase amid rising portfolio wealth and as a result of the denominator effect (where falling values in other asset classes automatically raise the value of real estate within the overall portfolio), Bellman said. "People will be raising their allocations in specific bands and may even raise the bandwidth," he said. "It will be a significant trend in the coming 12 months." Driving the trend towards prime is the search for income returns by risk-averse investors. Initially focused on Asia and the UK, it has recently reached some mainland European markets. The result has been a yield gap of between 300—400 basis points between prime and secondary assets. Meanwhile, pension funds will opt for listed real estate because it anticipates the performance of direct and non-listed funds and relatively robust balance sheets will provide capital for deployment in recovering markets, the report said. The risk to an otherwise positive prognosis is that the banks will release long-held real estate onto the market. "We expect them to do it but in a measured way," said Bellman. "That's part of our base case. "The risk would be if they were to do it too quickly, resulting in a wave of real estate coming onto markets if investors were reluctant to invest. Then there's the risk of further decline in capital values."