US - There are concerns in the US that pension fund allocations to real estate could suffer as a result of prolonged dislocation and modest performance in the coming years, the latest report by PricewaterhouseCoopers and ULI has revealed.

This year's Emerging Trends in Real Estate publication covering the US has highlighted concerns by industry experts suggesting pension funds could reduce their weightings to the asset class.

The report canvassed views on the outlook for US real estate from more than 700 industry participants, including investors, asset managers, consultants, property companies, lenders and brokers.

"If losses are worse than expected and demand for space sinks during an extended recession, always-nervous pension plan sponsors may revise allocation targets downward and pull back," the report suggested.

Another possible scenario put forward was that the stock market rally would prompt pension funds to focus their capital on benefiting from equity market upside, while downsizing their real estate exposures accordingly in the short-term.

"No-one expects core portfolios to score upper-teen annualised performance again anytime soon. A reversion to the mean indicates that the timing may be right to sidestep real estate in the near term, even after a correction," the report added.

One real estate researcher anticipated "a reduction in real estate allocations and modest 5% real returns".

Will investors be satisfied with bond-like returns after a "recent round of seesaw performance"?, the report asked.

Countering the concerns raised, the PwC/ULI report argued the outperformance of real estate in recent years may have "solidified its asset diversification credentials and place in institutional portfolios no matter what transpires in coming months,".

One conclusion was that equity capital will be more restrained without debt capital to stoke returns, and while lower-leverage investors, such as real estate investment trusts, may be active, opportunity funds will need to revise strategies and use more cash.

Survey participants also noted that many pension funds "should have been queuing up to get out of core open-ended funds two years ago" when returns were in the mid-to-high teens.

"Now they will be taking losses in mark-to-market funds," one said.

Some public pension interviewees apparently had considered reducing the number of real estate managers and funds to facilitate oversight for budget-stretched staffs.

Such a "winnowing process favours top performers with ‘big footprints' in managing funds across the risk-return spectrum as well as private/public and global markets," the report said.

When markets settle down, pension funds "will miss the best opportunities; they never make the first move," said one fund manager.