The tangibility of real estate makes it seem more accessible and easier to understand but the increasing complexity of the asset class means that pension funds need an in-depth knowledge of its characteristics. Rachel Fixsen reports
CONSTRUCTION WORKERS PENSION SCHEME
Pension fund secretary
TOTAL ASSETS: €1bn
REAL ESTATE ASSETS: €100m
The sheer complexity of today's property investment offerings means pension fund trustees have to be clued up about the asset class, according to Patrick Ferguson, pension fund secretary of Ireland's Construction Workers Pension Scheme.
The scheme manages assets in excess of €1bn of which 10% is held in real-estate investments. Ferguson sees several sources of information that pension funds can use to learn more about property, noting that many seminars are run on the subject, both in Ireland and the rest of Europe.
"Like most seminars, they tend to be pitched by the sellers of financial products, to get investors to buy into those products," he remarks. "If you can put aside the sales pitch, there's something to be learned."
He believes the educational resources are definitely out there. "There's certainly as much on real estate as there is for other asset classes."
The CWPS turns to its own property managers - Jones Lang LaSalle and CBRE - when it needs to know more. "If we're looking to expand our property knowledge, we would bring them on board and they have a good grasp of both indirect and direct property," he says. "They would give a non-sales-pitch presentation."
But he maintains that today's real estate marketplace is undoubtedly more complex than it was a few years ago. "There are so many new products coming on board, as well as leveraging; trustees need to be very sure about what they are looking at," he warns.
Checking out bricks-and-mortar investments before signing on the dotted line is one thing, but when an investor moves away from a direct product, he remarks that they need to take a host of new considerations into account.
"Some of the products can be quite complex, with the structure that underpins them including leverage and issues around how profit and returns are taxed," Ferguson continues.
Using external consultants is often the only way for a pension fund to be sure about the details of the investment it is taking on. As an example, Ferguson cites the CWPS's recent move to put €20m into a European Property Growth Fund with Standard Life.
"Before we signed up to that," he says, "we had Acuvest, our investment advisers, do due diligence on it, and went through it in detail."
ELECTRICITY SUPPLY PENSION SCHEME
TOTAL ASSETS: €32.5bn
REAL ESTATE ASSETS: €1.87bn
Institutional investors should know about all asset classes before they invest in them," Richard Barlow insists. Barlow is managing director of Electricity Pensions Services Limited, the central administrator for the UK's huge Electricity Supply Pension Scheme (ESPS).
But while it is important to be well informed, he feels that fundamentally, real estate is a relatively straightforward asset class.
"Property has the advantages that, firstly, it has been around for a very long time as an asset class - so its performance and other characteristics are relatively well understood - and secondly, everyone knows what offices, shopping centres, retail warehouses etc. are; they are intrinsically easier to understand than many more modern investment products," he says.
How much an investor needs to learn before going into real estate depends on which investment route they are taking, according to Barlow.
He explains: "The requirements are different if investors go down the direct ownership of properties route, because this will give rise to issues like independent valuation, powers of attorney, and a different approach to custody.
"Where trustees use indirect forms of property investment, the issues are really no different than for any other form of indirect investment."
The ESPS gets advice on property matters from its third-party investment advisers and property managers, Barlow continues.
"The advisers and managers keep the trustees and administrators well informed on
property matters," he says, adding that the scheme's main property manager was scheduled to run a training course for ESPS trustees and other interested parties later
"We find our advisers and managers very helpful," he says. And the forthcoming updated ‘made simple' guide from the National Association of Pension Funds (NAPF) would also help inform pension funds about the subject.
"There are, however, now more options available for property investment; some of these options will have different performance and other characteristics, and advisers and managers may need to raise their game to ensure that opportunities and risks are
properly understood," Barlow warns.
"The options for property investment are, however, now much wider, both in terms of overseas markets, and in terms of types of product," he says. "These newer property investment opportunities and products may not be so ‘common sense' as conventional property investments, may not behave in the same way, and may present new risks as well as new opportunities."
OP BANK GROUP PENSION FUND
Chief investment officer
TOTAL ASSETS: €824m
REAL ESTATE ASSETS: €214m
The pension fund of OP Bank Group in Finland holds more than a quarter of its €824m of assets in domestic property. Chief investment officer Magnus Backström feels that while investors should have some knowledge about the asset class, there is outside expertise they can turn to as well.
"Obviously you need to know enough to form an opinion on the attractiveness of the investment offering," he points out. "That decision has to be based on your own judgement. After that the level of expertise is a function of your expertise and the expertise of partners you might have involved in the decision-making process."
Not that the level of knowledge needed to get to grips with real estate is any different from that required for other asset classes. "With all investments you need to form an opinion on the investment strategy and its return drivers, the process, people and price of the offering," Backström remarks.
"It would be presumptuous to claim that we know everything about all our investments," he continues. "We need to have a basic understanding of the return drivers and risk factors of our investments. "An important part of our work is to evaluate whether our partner in the offering is the best possible and that our interests are aligned. Gaining the knowledge and training is made possible by networking and outsourcing some of the competences needed," he says.
But for pension funds out looking for education and training on real estate investment, Backström says he is convinced it is available.
Asked whether a lack of real estate knowledge on the part of pension funds could be behind the fact that many take the indirect investment route, he says the causality in the question should be turned around.
"Taking the indirect investment route allows you to benefit from the expertise of outsourced specialists," he states. "Your judgement is needed for evaluating whether the expertise is there and what fees and incentives are optimal."