Holding property directly has enabled two German pension funds to maintain a relatively high exposure to equities, according to their head of planning and controlling.

The Zusatzversorgungskasse Rheinland-Westfalen (KZVK) and the Gemeinsamen Versorgungskasse für Pfarrer und Kirchenbeamte (VKPB) invest 6.75% of their $8bn (€5.9bn) in assets in direct real estate.

Peter-Henrik Blum-Barth said this was one of the reasons the pension funds could “afford” a 25% equities exposure.

The “hidden reserves” built from the steady cash-flow from these investments “helps to increase risk-bearing capacity”, he said.

“Because of its predictable cash-flow, the illiquidity premium from the direct real estate investments does not strain the economic risk budget of a pension fund,” he added.

He stressed that other factors, including regulatory ones and the structure of liabilities and guarantees, also had to be taken into account.

Wolfram Gerdes, managing director for investments, added: “Direct investments clearly have priority over real estate funds, as they allow us to retain more added-value in-house.”

He said fund investments were made in “particularly promising” niches, but, for new investments, directly held properties were “clearly preferred”.

Gerdes also pointed out that, “as soon as you have your own infrastructure” to make such direct investments and manage them, a pension fund could “achieve effects of scale”.

The pension funds prefer properties “within our area of business” – mainly the German province of North Rhine-Westphalia and surroundings.

“Traditionally, we are not only investing in metropolises when we see an attractive risk/return relation but also in medium-sized urban centres,” Gerdes said.

He added that, in those cities, there was “less competition” from international investors.