EUROPE - Real estate risks becoming the "forgotten" asset class as Europe shifts away from defined benefit (DB) arrangements to defined contribution (DC), Goldman Sachs Asset Management's head of global portfolio solutions has warned.
Speaking at the IPD European Property Investment Conference in Frankfurt today, Paul Trickett also said he could not understand why property was not playing a larger role in liability-driven investment (LDI), as pension investors shifted their strategy due to increasing regulatory pressures.
He told delegates he had little luck obtaining data on European or US real estate allocations by DC funds and therefore concluded it was "negligible" - backed up by pre-financial crisis figures from the US that showed around a 1% allocation to property by the country's DC funds.
"Forgotten asset class? Beginning to look a bit like it from a pension scheme perspective," he said.
Trickett said UK data showed a decline in property's total share of the country's DB pension fund assets and that surveys indicated that the trend away from the asset class would only continue.
He therefore argued that LDI could help reverse this trend.
"I cannot understand why property is not playing a part in [LDI]," he said, highlighting that, currently, UK, Dutch and German schemes were simply buying local sovereign debt at very low yields.
"Why am I not being encouraged to think about the fact that, actually, there are income-producing characteristics that could make a contribution to my liability-matching portfolio," he added.
Trickett argued that the end investor did not, ultimately, care if the asset was in Rome or Paris, as long as the cash flow was available to pay for benefits.
"I can assure you that, at least in the UK, people really don't want to buy gilts or bonds with yields as they are - they are forced to buy them," he said.
He said there would be interest from a number of investors if they were therefore offered a "sensible" alternative to the sovereign debt issuances of many safe-haven countries.
Turning his attention to DC schemes, he said the investors were often less financially savvy and that therefore most assets were concentrated in traditional, easy to understand and cheap to deliver assets.
"The whole DC model across Europe is generally under-developed in terms of its asset allocation [model] and diversification because the market itself is relatively undeveloped, and few providers at this stage have the scale to be able to make sensible investments and a reasonable return out of it," he said. "But that will change over the next few years."
Trickett, who worked as head of investment consulting for the EMEA region at Towers Watson before joining the investment bank's asset manager, said that, as DC members became more aware of the importance of inflation-proofing their pension savings, it would "quite likely" lead to increased real estate exposure.
He added that real estate was currently in the difficult situation of being caught, as far as perception was concerned, between being regarded as a traditional asset and an alternative asset, therefore not always falling in the "like to have" or "fashionable to have" category for those deciding on asset allocation. But he believed that this could be changed.