In the past pension funds have panicked in times of market correction. Today many look to make the most of new opportunities. Richard Lowe reports

The current state of European real estate is bound to conjure up memories of the early 1990s when the markets entered into their last significant downturn. However, commentators have been quick to point out some important differences between today's scenario and the one facing the industry some 15 years ago. Today, for example, there is not the same level of construction in the pipeline and consequent potential for supply overhang.
Perhaps the most significant factor that distinguishes the troubles of the early 1990s from those of today is the way in which pension funds are typically responding to them.
"In the early 1990s, a lot of real estate investors, when the market turned down, just made an absolute decision to leave the sector," recalls Simon Martin, head of research and strategy at Curzon Global Partners.
Far from running for the hills, as was sometimes previously the case, institutional investors are recognising the opportunities that can potentially arise from market dislocation.
"It strikes me that the pension funds we deal with seem to be very much more aware of the opportunity that may be available in the event that the market disrupts," Martin continues. "There seems to be a greater awareness with the benefit of hindsight that when the market disrupts it can represent a threat but also an opportunity for an investor.
"I guess in the back of my mind I feared we would get the response, ‘real estate is turning down, the market is disrupting… we need to exit the sector'. But when we have talked to people they have had a much more pragmatic approach."
The remarks follow on from comments Martin made at a recent roundtable held to discuss the findings of the recent INREV Investment Intentions Survey. "The experience of the early 1990s was somewhat chastening," he said. "If you were a manager trying to sell the concept of an opportunistic fund to capitalise on distress in 1991 and 1992 you didn't get an awful lot of shelf space from investors. But investors are clearly very switched on to the dislocation and disruption that is occurring because of the credit crunch and that those will present opportunities."
Fellow roundtable panellist Patrick Kanters, managing director, real estate, Europe and Asia Pacific at ABP Investments, confirmed this was certainly the case for the €215bn Dutch pension fund, which was committing capital to vehicles that can "capitalise on the opportunities we expect will arise in the next year or so".
Indeed, Kanters reveals that ABP has invested in a number of "opportunity funds" over the last six or so months that can target "special situations".
The UK, particularly, is falling under the gaze of opportunistic investors, with the recent swift repricing of the country's real estate making the market look more attractive and mass redemptions in open UK property funds inviting the prospect of forced sales of assets. It is no coincidence that a number of so-called ‘vulture' funds, or the more euphemistically titled ‘opportunity' funds, have declared their intent to swoop on distressed assets which they expect to arise as the year progresses.
Managing Partners Limited is just one investment house to have launched such a fund, which it describes as aiming to "take advantage of the deep discounts that are appearing in the market as a result of forced sales". Investment banking and private equity house Evans Randall, meanwhile, claims it is intending to acquire up to £1bn (€1.34bn) of real estate as "some funds seek to liquidate assets in response to redemptions by their investors".
Other similar opportunistic funds have been or are in the process of being launched by Resolution Property, Invista Real Estate Investment Management, Laxey Partners, London & Stamford and Valad Property Group, among others.
The Universities Superannuation Scheme (USS) is not planning to invest in such funds, but it may well be looking to benefit from the same sorts of opportunities in 2008. The €40bn UK pension fund has been a net seller in the UK market for 18 months, offloading a number of retail assets to the tune of £900m (€1.2bn) to enable an increased exposure to other markets, including alternatives and mainland Europe. However, as Graham Burnett, head of property, explains, USS is again targeting the UK.
During the last 18 months, the pension fund sold three large retail assets: Telford Shopping Centre in the West Midlands, Gyle Shopping Centre in Edinburgh and Trinity Quarter in Leeds. "I wanted to reduce the retail weighting and the market conditions at the time were very conducive to selling assets and getting good prices," Burnett explains.
"We felt at the time that pricing was pretty fierce and we didn't see a great deal of value in the UK, so we shifted some of our exposures to alternatives, such as student housing and residential, plus continental Europe."
However, with the UK experiencing sharp corrections and a growing sense that prices were heading in the direction of ‘fair' value, USS has begun to consider its domestic market with much interest. "We are beginning to look again at core sectors in the UK," Burnett says.
USS has already purchased Eden Walk Shopping Centre in Kingston-upon-Thames for £80m (€107m), representing a significant discount on the £90m (€120m) price tag attached to it last summer. "It is a fantastic retail centre. We think it has some asset management potential and the pricing we acquired it for was certainly more attractive than it was pre-credit crunch. The market correction has allowed us to buy it at something nearer fair value."
And USS has seen a "number of other opportunities come across the desk", particularly during December and January. He admits this may include distressed sellers.
"There are clearly a number of sellers out in the market at the moment who have certain issues to deal with - redemptions for example - and are having to sell. Some of them have postponed the need to sell for a period, but ultimately will still have to raise cash. Potentially, opportunities will arise," Burnett says.
"It is pretty mixed quality at the moment," he adds. "Ideally, most funds would like to sell their weaker stock. The nature of the market at the moment means that those funds that need to sell will perhaps have to offer their better assets, in order to attract interest."
Burnett confirms Martin's assertion that pension fund investors are today much more prepared to see troubled markets as potential areas of opportunity than they were a decade ago. "In the past we may have missed these opportunities," he admits.

As a UK pension fund, USS is not alone in returning to the domestic real estate market, according to Andrew Smith, head of investment strategy at Goodman Property Investors.
"A year ago, all of the discussions we were having with UK pension funds were about diversification into continental Europe or sometimes beyond," he says. "The discussion has shifted now to incorporate the UK once again as part of a European portfolio.
"There was a concern that UK pricing was getting quite stretched and was looking uncompetitive, so a lot of the money was being channelled into continental Europe until the middle part of last year. What we are seeing now is more people taking a pan-European view where the UK is coming back onto the agenda again."
Of course, it is not just UK pension funds that are refocusing on the market, but institutional investors across Europe, the US and Australia.
"There are a lot of people who steered very clear of the UK in 2006 and 2007," says Martin. "The people who used to say, ‘no, I wouldn't go near the UK, it's overpriced', are now starting to believe the UK is going to start looking interesting in the next 12-18 months.
"There is a rapidly changing perception that something significant is going to happen in the UK and that is going to offer some value to people who are prepared to wait by the sidelines."
The difficulty these investors are faced with is when to make the commitment. Values in UK commercial real estate have certainly fallen, but with a dearth of transactions from which to draw evidence, it is difficult to evaluate when the market will reach fair value.
While Kanters certainly sees opportunities in the UK for 2008, he admits it is "debatable" whether "external valuers who have priced in strong negative revaluations without evidence" are essentially correct.
Smith adds: "There are a lot of funds that are recognising that prices have shifted and are thinking about when the right time is to move back in. But there is less action at this stage, because they don't want to go in too early.
"They don't want to buy an asset and then find that prices fall a bit further. That could be awkward if they are too early into the process. There is quite a lot of pent-up demand, but it is going to take a little while before people have the confidence to make that first move."
Burnett agrees this is the "conundrum" facing investors. "Yes, some investors are now looking again at the UK market and thinking it is potentially attractive," he says. "But there is risk on the downside still, particularly with regard to the economic background. However, I think it is a good time to at least start looking."
Burnett believes that while continental European markets are, by and large, "proving at the moment to be more robust than the UK", there is potential "for pricing to come off".
"Continental Europe has seen significant yield compression along with the UK and there is always an element of contagion, particularly given the wider economic uncertainty. The credit crunch has hit all markets, frankly," he says.
Spain is one real estate market on the continent that has the most potential for investment opportunities arising from dislocation and distressed sellers. "It is going to be a really interesting place over the course of the next 12-24 months," Martin says.
ABP has certainly identified an opportunity there, having entered into two club investments in 2007 with a view to capitalising on market turmoil in the near future. Kanters explains that the pension fund is aiming to profit from "distress or certain situations in the property market itself" by employing the expertise of specialist managers with "teams on the ground that are very well informed in the market".
Martin believes that the Spanish market will start to see opportunities flowing from investors seeking to exit the market. "The strength of the housing market boom has percolated into virtually all of the commercial markets and right through into its economy, and now seems to be in reverse," he says. "The Spanish market has all the characteristics of a boom that has evaporated and is about to slam down".
However, there have yet to be any "visible symptoms", he says, possibly because the ECB has been "doing everything it can to prevent the Spanish mortgage banks from collapsing around themselves".
Martin concludes: "If it does start to show up and some more pain starts to show, I think there will be some extremely interesting investment opportunities there over the course of the next couple of years, because the scope of the boom was way beyond anything we saw in the UK."