REAL ESTATE - UK pension funds need to upgrade their real estate managers if they’re to expand mandates into mainland Europe and beyond, according to Mercer consultant Greg Wright.

Wright argues that yield compression and the opportunity to generate higher returns in less efficient markets should encourage pension funds to invest in mainland Europe.

“I’m not saying the market will necessarily go down because of yield compression – it could go up or sideways – but in the UK investors will be looking at returns of 7%-8%, rather than in the teens,” he said. As a result, UK pension funds need “a change in approach, and perhaps mindset” to expand beyond the domestic market.

The problem, he said, is that incumbent UK pension fund managers don’t have the skills and experience to fill the wider role. Lack of familiarity with listed vehicles – at least until the UK gets its own REITS legislation – could prevent pension fund managers getting to grips with pan-European real estate opportunities.

“If you want to extend your mandate, the managers you see running global real estate mandates are not the same as those running UK pension funds,” said Wright. The global fund managers UK pension funds will need to do the job properly will be “half property manager, half equities manager – someone capable of putting together a portfolio of listed property vehicles”.

Luckily for UK pension funds, Mercer has already identified “a reasonable number” of managers with the required skill set, “and there are others we don’t know about yet”.

But Wright said he was not recommending the wholesale sacking of existing managers – at least not yet. “The change will be incremental in the short term, with managers building up additional weightings,” he said.

In the meantime, Wright said Mercer’s pension fund clients were proving responsive to the argument for change.