Belgian investors play safe. Now the priority is to de-risk and rebalance, says Shayla Walmsley

When real estate emerged as an asset class in the 1990s, Belgian pension funds favoured directly held disparate assets, shifting to REITs when firms such as Cofinimmo bought those assets. By the end of the 1990s, they had diversified into pan-European listed real estate, allocating on average 9% of their portfolios - 8.5% of it indirect.

Their traditionally cautious approach to investment has saved Belgian pension funds much of the fallout from toxic assets, simply because they have so few of them. In a presentation he gave in February, Philip Neyt, chairman of the Belgian Association of Pension Institutions, defined the investment approach as "mainstream, simple, liquid and long term…without frills and without complexity".

The problem is that this has not been enough to ensure returns. Despite having virtually no exposure to toxic assets, Belgian pension funds lost 20% of their asset value in 2008.
Unsurprisingly, then, some schemes recognise the limitations of the old approach. Belgian bank KBC's scheme, for example, in mid-2007 broadened its real estate investments within a 10% allocation to include senior housing, timber and infrastructure. Although the forecast return of 6% did not change, the hope was that diversification would curb volatility.

Karel Stroobants, an independent director of the sector-wide Belgian metalworkers' pension scheme, has urged pension funds to "go back to basics". "Despite what happened over the past seven-eight months, most pension funds didn't change their asset allocation - they didn't rebalance," he says. "Belgian pension funds are too small, and in general the managers aren't specialists. It depends on the asset manager, but the market is too small. Big asset managers should show more innovation," he says.

In contrast to Belgians, overseas investors have identified in Belgian property a counter-trend to an otherwise moribund pan-European market. Despite negative capital growth across office segments, annualised returns over a three-year period averaged 7.6%, compared with -51.7% for equities, -15.4% for property equities, and 4.5% for bonds.

For Tom Goyvaerts, commercial director of BNP Paribas' Belgian real estate operations, the appeal is obvious enough. "If you look at office, Belgium is the fifth-largest market by size in Europe. It may not be London and it may not be Paris, but it is a significant market," he says.

"Belgium is not an island - it's subject to the worldwide economy, but to date the negative impact has not been as dramatic as in other markets," says DEGI spokesman Dietmar Müller.

That delayed reaction will likely disappear. Data released by the IPD at the end of April revealed a "mild" correction, with income returns on commercial real estate falling 10bps to 5.7%, generating an annual total return of 4.5%. At the same time, retail returned 4.4%, backed by capital growth in shopping centres at 5.2% (compared with 10.3% in 2007).

One of the most promising investment routes identified by Stroobants, among others, is infrastructure - both pure infrastructure, such as toll roads, and social infrastructure, such as hospitals and schools. Although Belgian pension funds currently allocate on average 0.8% of their portfolios to the asset sub-class, Stroobants claims there is €€200m ready to invest, largely among sector-wide pension funds because if offers "creative" sustainability with a value-add versus "just providing a sustainability overlay".

For Edwin Meysmans, managing director of the KBC scheme, the pull is simple: infrastructure is uncorrelated. "It's a long-term investment that's inflation-linked and with a high-level guarantee. With the right mix and the proper guarantees behind it, investors should be looking at a 20% target asset allocation."

Despite the demand for financing for infrastructure projects and the reluctance of banks to provide it, Belgian pension funds are in the main too small to invest directly. Hence the potential demand for a vehicle that would allow them to invest indirectly.

Francis Heymans, a director at fund manager Petercam, likewise sees the potential for pension fund investment. "At first you'll see the bigger pension funds investing - but nothing excludes smaller ones investing in a pool, for example. Volatility comes with a daily price. If you don't have a daily price, you don't have volatility."

In the meantime, the big issue for real estate investors is correlation. Meysmans claims that recent economic events have vindicated KBC Pensioenfonds' 2008 decision to reduce its allocation to listed real estate in favour of unlisted. He says the scheme is also looking at direct deals in Brussels.

"The priority today is to de-risk and rebalance - to be comfortable with the risk," he says. "Once we have de-risking, a rebalancing, they can have another look."