Ireland's CWPS has identified significant changes it would like to make to its real estate strategy, but the malaise in the domestic property market is forcing the fund to hold its position. Richard Lowe reports

The Construction Workers' Pension Scheme (CWPS) in Ireland has been undergoing a review of all of its asset classes and investment strategies since it was restructured in 2006. It has undertaken a review of its equity, bond and alternative investments, with the effect of moving heavily into alternatives at the expense of stocks. Only now is it revisiting its real estate investments.

Having the majority of its real estate exposure through directly held property in Ireland means it is not in a position to make any quick changes to the make-up of its portfolio, not at least until the Irish real estate market sees improvement.

The Construction Federation Operatives Pension Scheme (CFOPS) was set up in 1965 by the Construction Industry Federation to provide a top-up pension for the employees of Ireland's building industry. In July 2006 it became the CWPS. It was more than a just a change in name: it became a hybrid scheme, which necessitated a review of its investment strategy.

"While we are still classified as a defined benefit scheme, the structure changed insofar as members' funds are all treated on a defined contribution basis, so we had to put a new strategy in place and we have been working on it for a couple of years now," says Pat Ferguson, chief executive at CWPS. "We have really looked at every element of it: our equities, our bonds, and our alternatives. We have gone fairly significantly into alternatives and out of equities. The next in line was property."

CWPS's investment consultants recently undertook an investigation into the role real estate should play in the pension fund's portfolio. CWPS has a €66m exposure to real estate, representing 7% of the fund. It consists of three retail assets and three office blocks in Dublin worth €35m in total, and a €31m holding in Standard Life Investments' European Property Growth Fund. The pension fund first moved into European real estate, via the Standard Life fund, in early 2006 when it was still CFOPS. The move was a result of a 2006 strategic review, which concluded it should increase its real estate weighting and diversify into overseas markets.

"Traditionally, pension schemes in Ireland held an office block here and an office block there, and then they sold out and moved into various property funds. We are one of the last few pension schemes to have a significant direct-held property portfolio in Ireland," Ferguson says.

The CWPS real estate portfolio has lost 60% of its value in the past two years. Irish property has been particularly badly affected by the global downturn, with a peak-to-trough fall of 59% since the second half of 2007, according to Investment Property Databank (IPD); even in the third quarter of 2011, values fell by 2.6% and total returns were -0.3%.

Fortunately, as a long-term investor CWPS is able to take this hit and will hold its direct property through the downturn and, hopefully, through the recovery. "The downturn in the property market hasn't really affected us," Ferguson says. "It has in terms of the value of our property, obviously - there was a significant downturn in the value of our Irish property- but we never needed to cash in, and we have time to sit and wait until it comes back. If we didn't have that we would have been in trouble."

Ferguson says the pension fund would still have undertaken its review of real estate if the asset class had remained buoyant in recent years. "The investment consultants are now looking at property - not so much our own portfolio, but more globally - to see exactly where property should be positioned in a pension scheme and what form property should take," he says.

The upshot of the review is that CWPS is likely to rebalance its real estate portfolio away from directly held assets towards a more comprehensively indirect pan-European exposure. For the moment, however, this is an ambition and not something that is likely to be effected any time soon. For the foreseeable future, the pension fund will take a ‘hold' position until conditions in the Irish property market improve.

"We will continue with the structure of our property fund as it is, mainly due to the illiquidity of our directly held property," Ferguson says. "If we were to make any move away from directly held property - and that's what we will do in the future - we wouldn't be thinking of disposing of it in the current environment until property prices improved a bit."

Ferguson guesses that it will take at least two years before the six properties held in Ireland can be disposed of. "We are not going to put them on the market as a job lot," he says. "One or two of them may be in development areas where they could be sold for redevelopment. The market conditions would have to be much improved on what they are now before we go down that road."

Another potential change arising from the pension fund's investment review is its future weighting to the real estate asset class. CWPS currently has a 10% allocation to property, but Ferguson says this could rise to between 12% and 15% in the future. Again, the pension fund is only likely to act on this once market conditions improve and CWPS is in a position to rebalance its portfolio.

"Property does seem to be on the up to some extent, but it will probably be at least 12 months before we start to initiate anything and it will very much depend on market conditions," Ferguson says.