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IPE special report May 2018

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Property helps match asset/liabilities – DeAM

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UK – Deutsche Asset Management’s property arm says property can help institutions such as pension funds match liabilities with their assets.

“Property has a particular way of delivering investment returns that make it suitable for institutions seeking to match their liabilities with appropriate assets,” said DB Real Estate Research said in a new.

“At a simple level, property rental income is a good tracker of GDP. We find that a multi-asset portfolio that optimises the match between assets and liabilities has a significant property component.”

The report, “The Case for Property”, said property offers a fair risk/return trade-off when compared to other asset classes. It was also a “good portfolio diversifier”. It also said that most institutions do not have enough property allocation.

"The optimal allocation to property seems to be far greater than current holdings by most non-specialist investors," said Nick Tyrell, head of European Research at DB Real Estate.

He added: "For the past decade property has languished in many portfolios as a little-loved and barely understood poor relation to stocks and bonds.

"Recent stock market weakness has left many investors wanting to get closer to the asset, but lacking the analytical material to be able to make a serious case for increased weightings. This paper will go some way towards redressing the balance."

The report puts the optimal portfolio for asset/liability matching at 71% UK government bonds, 16.6% property, 12.4% equities and 0% cash.

“It seems that whether you’re a risk/return maximiser, or an asset/liability matcher, property has a greater role to play in your portfolio,” the report said.

Tom Hughes, Deutsche’s global head of asset management, said: "Real estate may very well be the most important asset class for institutional and retail investors over the next five years".

Deutsche found that a property allocation of 50% over a 32-year period, produced a target return of 13.5%, or a real return of 6.0% - allowing for average UK inflation of 7.5%.

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