UNITED STATES - Mercer Investment Consulting is expecting less pension fund money to enter the US real estate markets this year.
According to Real Estate newsletter, the market has matured sufficiently to expect inflows of assets will now slow, said Allison Yager, senior consultant at Mercer.
"Over the past few years, performance has been strong as capital has flowed in the real estate sector in anticipation of improving fundamentals. Now with the improvement realized, capital flowing to the sector is anticipated to slow," said Yager.
Similarly, many large pension funds are getting close to their allocation levels and are not in a position to be increasing them anytime soon.
"This will mean there will be less capital in the marketplace from previous years for pension funds," according to Yager.
That said, Mercer is seeing some medium-sized pension fund clients putting new capital into real estate, such as corporate and public pension funds clients with total assets of between $1bn ($744m euros) to $15bn.
Investors are split into two categories, the first of which are establishing an allocation to real estate for the first time.
"The amount that these investors have approved for real estate is in the range of 5% to 10% and the initial searches for this capital could have either a core or value-added strategy," continued Yager.
A second group of investors are pension funds are also re-entering the real estate market for the first time in 10-15 years.
"These pension funds are returning to the market because of the asset classes’ strong performance and the diversification benefits that it gives," said Mercer.
Infrastructure is an asset class that it getting a lot of attention from many pension funds because of its low correlation to the equity market and stable and predictable cash flow.
"Infrastructure can be attractive addition to a portfolio, Yager commented.
"In order to receive full diversification benefits, it should not be a substitute for a real estate or private equity allocation."
Another kind of investment getting significant play from pension fund capital is public REITs, and this will continue to happen as long as large amounts of capital is being raised.
"These kinds of deals will continue to happen. This might slow down a little bit as there are now more sources of capital for these deals," Yager added.