Some analysts are speaking about a return to real investments, such as property, but for Austrian Pensionskassen this is not reason enough to boost these allocations, Barbara Ottawa finds

"W e remain cautious because liquidity is an issue," says Claudio Gligo, head of asset management at the €500m Victoria Volksbanken Pensionskasse. In 2002 the fund started to invest in real estate and has been invested in one Spezialfonds issued on Austrian commercial property by the German real estate fund manager Warburg-Henderson.

Currently the real estate exposure stands at around 5% and so far it has not contributed negatively to the performance. "Our strategy was successful and we are looking into maybe broadening our investment focus," says Gligo, but he adds that this would not be a major increase in the exposure.

"The devaluations in some markets might be a chance to enter but no decisions have been made yet," he adds. In western Europe this might apply to London as the city is always what Gligo describes as "far ahead in the cycle". However, central and eastern Europe is also being looked into. "Last year the demand was strongly focused on western and central Europe," confirms Bruno Ettenauer, CEO of Austrian listed real estate company CA Immo.

"The interest might spread to eastern Europe but it will still always focus on quality real estate in good locations and with high tenant creditworthiness."

Another trend among Austrian institutional investors is demand for sustainable, energy efficient buildings. "All the transactions that took place last year involved such buildings," Ettenauer says.

He believes that there will be increased demand in such quality real estate projects among Austrian institutional investors including pension funds.

And statistics show that over the last year the real estate exposure in all 17 Austrian pension funds has increased from an average of 2.28% to 2.45%.

The average exposure is higher among multi-employer funds (2.75%) than among company pension funds (0.73%). Ettenauer believes the need for an inflation hedge and a source of higher returns is the reason for a heightened interest in real estate. "The scenario of an inflation increase is something that sits in the back of many investors' minds," Ettenauer says.

For Günther Schiendl, CIO of the largest Austrian Pensionskasse, the €4.2bn multi-employer pension fund VBV, real estate investments are part of a strategy against a possible increase in inflation.

"We have to expect inflation to become an issue over the medium term," Schiendl points out. "However, we must not panic about inflation, we must prepare for it."

Christian Böhm, head of the €2.3bn multi-employer pension fund APK Pensionskasse, is not convinced real estate investments are a 100% inflation hedge, though. "It is true that rents go up with inflation, but if people cannot pay the rent you have a property without a tenant that is not good for investors either," he explains.

For Stefan Eberhartinger, head of the €680m company pension fund for Siemens, Austria, inflation is "not an issue at the moment". And although he thinks real estate investments are a good hedge against inflations in the current environment, this is not a deciding factor for an investment. "It is a sensible replacement for bond returns and real estate offers low volatility," Eberhartinger says.

His fund had a real estate exposure of 2-3%, via both open and close-end property funds until mid-2008, but is currently working on increasing it to 8%, with an initial investment of €60m via external fund managers.

Most pension funds agree that real estate is a portfolio stabiliser - especially when investing in Austria, explains Gligo, as this market did not suffer the property bubbles seen in other cities.

Schiendl is convinced that real estate markets in general "have shown stabilising tendencies lately and could generate positive returns in 2010 after two years of negative performance".

As always in the Austrian pension fund system, it is more difficult for multi-employer funds to make changes to their investment strategy than for company pension funds as they only have one board member to convince. "Real estate is a topic where many people think they can contribute to the debate," Gligo points out. "Much effort has to go into convincing members, but if you slowly build a long-term strategy then you can bring clients on board."

The debate on real estate investments has been tainted over the last year with difficulties in the Austrian real estate company Immofinanz, as well as uncertainties regarding an increase in the jobless quota and a slower economic recovery than expected. These two circumstances could have a negative effect on the real estate markets, a few pension fund representatives have pointed out.