UK - Three-quarters of UK pension funds are either maintaining or increasing their current level of exposure to real estate despite the recent turmoil in their domestic commercial property market.

More than 25% of pension funds surveyed by the Pensions Management Institute and asset manager Prupim in June said they are planning to increase their allocations to real estate, while more than 50% are intending to maintain current levels.

"That was the encouraging, comforting message to come out of the survey: that after a year's worth of difficult news for the property market they weren't running away from the asset class," said Paul McNamara, head of research at Prupim.

"These findings confirm the long-sighted nature of pension schemes as investors and it is reassuring to find that pension fund managers and trustees still see opportunities in both the UK and overseas commercial real estate markets over the next three years."

A small minority (8.5%) of pension funds said they were planning to decrease their real estate allocations over the next three years, but there is no evidence to suggest any direct connection with the sudden downturn and increased volatility in the UK market.

The vast majority (73%) of pension funds said recent developments had not altered the perceived benefits of investing in real estate.

However, some pension fund managers and trustees admitted they had been shocked by the scale and speed of the falls in capital values in the UK, while a number commented on the increased volatility being exhibited in the market.

One respondent noted pension funds had been attracted to real estate by its lower volatility relative to equities, coupled with higher return expectations compared with bonds, only to discover the level of volatility had possibly been underestimated.

"They are a bit shocked at the speed at which things happened," said McNamara of the recent falls in UK prices.

"They are redoubled in their keenness to see that issue addressed through diversification or they want to think about more liquid solutions."

One survey respondent said: "Our perceptions of the benefits from real estate have changed - we are seeking lower volatility methods of owning real estate."

The fund management industry might be interested to learn UK pension funds' top three characteristics of a successful real estate manager are, in order of importance:
clear investment process;
good operational risk controls, and
top quartile performance over the medium term.

"The natural expectation is to see top quartile performance right out there in front," said McNamara.

"It is a clear message for [fund managers] like ourselves that we have to be able to articulate what it is we are doing and why."

Another surprise was that pension funds placed "strong sustainability credentials" fourth in terms of importance.

"It finally scotches that notion that nobody cares about sustainability," said McNamara.

The finding is even more noteworthy as the survey was mainly representative of corporate pension funds, as local authority schemes - which have been active in the sustainability space for some years - made up only 6% of the sample.

"If it had been 96% local authorities it would not have been any where near as surprising," McNamara said.

A full copy of the report is available at