Despite the challenging times being experienced by real estate, allocations to the asset class are set to increase. Flexibility in how and when to reach the target allocation seems to be the best policy. Richard Lowe spoke to three funds

NAME: Neil Sellström
POSITION: Principal accountant
ORGANISATION: North Yorkshire County Council Pension Fund
TOTAL ASSETS: £1.2bn (€1.5bn)
REAL ESTATE ALLOCATION: 0% (target 5%)

The North Yorkshire County Council Pension Fund has chosen to move away from its simple 77/23 split between equities and fixed income and is planning to diversify into real estate for the first time.
A tender notice issued by the local authority pension fund management department earlier this year revealed that the institution was seeking a manager for a £60m (€75.4m) global property portfolio, making up 5% of its total assets under management, which currently stand at around £1.2bn.
As Neil Sellström, principal accountant at the pension fund explains, the primary reason for investing in real estate was to benefit from diversification benefits and the target quota of 5% is seen as a suitable entry level
allocation.
"We have looked at property in an attempt to improve the diversity of our portfolio and thought that 5% seemed like a reasonable starting point, being significantly large enough for some diversity but realistic enough to gain access," he said.
Sellström added that based upon modelling, 5% had a significant impact in reducing the pension fund's risk budget without affecting the expected return, and indicated that this level of exposure could well "increase over time".
From a short-term perspective now certainly seems like a difficult time to enter into the asset class, especially considering the mature real estate markets are no longer enjoying the unbroken growth and yield compression of recent years, emerging markets notwithstanding. Is North Yorkshire in danger of ‘missing the party'?
Of course, Sellström reminds us that the institution has made its strategic decision to allocate to real estate with a long-term perspective. Furthermore, making the decision to invest in real estate today could turn out to be quite fruitful in terms of timing.
"The decision was based on the long-term view, although we hope that by early 2009 the market may look attractive and we will then be positioned to take advantage," he says, adding the caveat "only time will tell".n

NAME: Marçal Decoppet
POSITION: Director
ORGANISATION: Caisse Inter-Entreprises de Prévoyance Professionnelle (CIEPP)
TOTAL ASSETS: CHF2.8bn (€1.74bn)
REAL ESTATE ALLOCATION:  6.1% (target 10%)

The Swiss pension fund Caisse Inter-Entreprises de Prévoyance Professionnelle (CIEPP) currently allocates only 6.1% of its CHF2.8bn (€1.74bn) assets under management to real estate.
It has a target allocation of 10%, which was set following an asset-
liability management study in December 2006. But the fund has experienced difficulty in maintaining this level recently due to a lack of investment opportunities in its domestic market, where the vast majority of its property investments are located.
Marçal Decoppet, director at CIEPP, explains: "The allocation decreased during recent years as a result of a dilution due to a sharp increase in the fund's assets. However, we will increase it over the coming months, towards 10%."
This will be done partly through the fund continuing to increase its overseas property exposure, which it started in 2005
. However, the main means of reaching the 10% allocation level will be to make further direct investments in the Swiss market.
Credit Suisse's latest Pensionskassenindex shows that direct property assets held by Swiss pension funds outperformed the rest of their investment portfolios, with direct Swiss property returning on average close to 4% in 2007 versus an overall total return of 2%.
Decoppet believes this is one reason that Swiss pension funds should maintain a significant allocation to their domestic real estate market.
However, the relatively small property market in Switzerland is becoming increasingly competitive as Swiss institutions all go after the same assets, a situation exacerbated by an increasing inflow of foreign capital into the market.
"We are potential buyers of quality direct real estates in Switzerland at net returns in excess of 4%," Decoppet says. "But the current market conditions make it difficult to maintain exposure, particularly for a fast growing pension fund such as CIEPP."

NAME: Rainer Jakubowski
POSITION: chief executive
ORGANISATION: Versorgungskasse des Bankgewerbes (BVV)
TOTAL ASSETS: €19bn
REAL ESTATE ALLOCATION: 6% (target 8%)

BVV pension fund reviews its strategic allocation to real estate every two-three years, a process that always involves the financial committee of the fund's supervisory board.
Rainer Jakubowski, chief executive at the €19bn fund for the financial industry in Germany, explains that the current target quota for real estate is set at 8%, but this is yet to be reached. "We have invested a bit less than 6%, but we are on the way to 8%," he says.
As is the case with most pension funds, the target real estate allocation is set at a "strategic" level and is not a "technical" decision, Jakubowski says. In other words, the allocation level will not be subject to short-term market changes, which might affect more short-term tactical investment decisions, such as which sectors and geographies to invest in.
"If it is a strategic decision then it is not on the agenda every three months," he adds.
Perhaps more interesting is the fact that BVV does not set a "strategic timeframe" in which the 8% target allocation must be reached. This is a "technical" decision that depends on market opportunities.
"We haven't defined that we would like to reach the 8% in, let's say, 2009," Jakubowski says. "That is, of course, an open question, because how you increase your strategic position in real estate should be a technical decision."
And BVV is seeing opportunities to work towards this target allocation, despite property transactions across Europe slowing significantly in recent months.
"There are market chances we can use, so we are still investing," he says. "We are right now in the process of investing in a certain project in Paris and we are considering several investments in the UK where the yields have increased substantially."