UK - More than half of UK pension funds are planning to increase their allocation to commercial real estate, despite the dramatic falls in values since 2007, according to research by investment manager Prupim and the Pensions Management Institute.

The survey found that 52% of pension fund managers and trustees questioned, which manage an estimated £140bn (€150bn) in property assets, said they expected to increase their investments in global and domestic commercial property markets between now and 2012.

Less than one in six respondents said they expected to lower their pension fund's exposure, suggesting more than 80% of respondents planned to increase or maintain their exposure to commercial property.

"After a traumatic period for commercial property, institutional investors appear attracted to the relative cheapness of the asset class compared to other alternatives," said Paul McNamara, director and head of research at Prupim.

He added that this institutional appetite for new commercial real estate investment is accompanied by the desire for a return to a "back-to-basics approach".

"They are tending to favour more mainstream vehicles over exotic alternatives; are expecting lower, steadier returns, and they prize clear investment processes and strong operational risk management above all other factors in a successful fund manager," said McNamara.

The report also suggested there is an increasing appetite for global property markets, as nearly a quarter (23%) of respondents are investing globally, sharply up from 14% a year ago.

A similar number (24%) said they expected to increase their global investments over the next three years.

McNamara said: "The commercial property crash has been a global phenomenon. But even though a number of the world's mature property markets are still some way from correcting, the research suggests investors are increasingly recognising the opportunities and benefits of diversification in different territories, with Europe by far the most favoured overseas market for these investors."

The report also found that UK pension funds are more likely to invest through pooled funds and other unlisted investment vehicles when seeking exposure to domestic real estate, with 41.7% taking this approach.
Fund of funds approaches and direct investment were less popular at 17.7% and 16.7%, respectively.

Other approaches included segregated mandates (10.4%), listed real estate (9.4%) and property derivatives (3.1%).

According to the report, the most prized main characteristic of a successful real estate manager were clear investment process, good operational risk controls and top quartile performance.

The survey also found that diversification remains the most common reason for moving into commercial property, with pension funds seeking the asset class's low correlation with other asset classes.

"The research for the 2009 report suggests that the UK pension fund community's view of the asset class is in a state of flux," said Vince Linnane, chief executive of PMI.

"After the unprecedented falls in commercial property values of the last two years, the renewed appetite for commercial property is accompanied by a demand for clarity of investment process, strategy and performance."

It was estimated that the survey respondents represented approximately 15% of UK pension fund assets.
McNamara said: "These findings are a significant bellwether of investor sentiment. They imply increases in pension fund exposure to UK and, to a lesser extent, international property, but also strongly suggest that asset allocators will demand clear and robust investment processes from investment managers."