For institutional investors in Belgium, real estate has always been a core asset class alongside bonds and equities, forming the bedrock of a portfolio, rather than an exotic addition like hedge funds or private equity.
Not so long ago they might have invested directly in buildings, but more recently the trend has been to go for listed securities or funds to build up a diversified portfolio of property.
The rules changed in 2000, giving Belgian pension funds greater freedom to invest abroad; previously only investments in the domestic market were permitted. Now the sole limit on investment is a cap of 10% of the portfolio on any direct investment in a single property, which gives funds relatively free rein to invest as they please. Yet funds have hardly taken advantage of their freedom to seek investment opportunities beyond Belgium's borders.
Jos Verlinden, a director of the Belgian Association of Pension Institutions (ABIP), said funds continue to target domestic real estate. "The legislation changed six years ago. But just because the legislation allows the pension fund to invest overseas that doesn't mean they automatically do that. I don't think they are moving away from Belgian real estate."
he constraints of the markets are mostly a question of size. The Belgian pension scene is characterised by the proliferation of smaller funds. According to the latest survey of Belgian pension funds for 2005 from ABIP, the largest number of funds (71) had assets of under €25m, with an average asset value of €7.6m. Only 22 funds had assets of more than €125m.
ABIP's statistics put the average allocation to property of Belgian funds at 7.5%, in 2005 (1.2% direct and 6.4% indirect investment), which was up from the previous year's 7.2% (1.6% direct and 5.6% indirect).
But it would be unwise to conclude from these figures that investment in real estate is rising, says Verlinden. He points out that an explanation could be that the relative performance of real estate compared with other assets has increased its weighting in the portfolio.
Karel Stroobants, a partner at Antwerp-based consultant Akkermans Stroobants, thinks that the main challenge facing institutional investors is the move from direct to indirect investment. He notes that the small size of the average Belgian pension fund effectively rules out direct investment through the burden it puts on resources. The first step in the move into indirect investment is usually into a real estate investment trust, like Cofinimmo or Befimmo, which invest in Belgian real estate.
But he says that the more savvy funds are taking this a step further with a diversified portfolio of real estate investments: "The more sophisticated pension funds took one step further to look at a portfolio of indirect investments, comparable instruments to REITs, all over Europe. That is the final process for the modern pension fund. They don't have to be too big to do - the pension fund of the metal workers is an example - and Amonis did it 10 years ago. They decide on a specialist real estate mandate with diversification, Europe mainly, then some add a bit of Asia, a bit of US. It depends on their risk profile."
This is the route being taken by VRT Pension fund. Its two pension plans - the DC plan for contractual personnel and the DB scheme for statutory personnel - both have relatively high allocations to real estate. The DC has 10% in this asset class and the DB plan has 13%. The real estate portfolio is currently Europewide, benchmarked to the EPRA Europe index.
The fund is considering broadening its geographical range via listed securities in order to increase diversification, said Florent Verberckmoes, the fund's senior investment officer. "Publicly traded property securities offer an effective means to invest in real estate and doing so on a global basis offers an efficient means of investment across property markets," he said.
Rising prices for property and lack of liquidity are other hurdles that investors face. Managing director of Pragma Consulting Koen de Ryck commented: "Because property has performed well as an asset class over many years I find it quite expensive. Since our portfolios are internationally diversified, price is something which we have to keep an eye on. Even if it is all listed property it is an asset class which clients cannot easily get out of. I think the liquidity of the listed property has been improving over the years, but one cannot say that it is as liquid as ordinary shares, for example."
omestic property prices have been driven up by the interest from foreign investors, according to Verlinden, who said Belgian property was relatively cheap compared with other countries until recently. One result has been to push investors to seek a wider range of assets for investment. "Cofinimmo mainly invest in offices in the central business district of Brussels, but over the last two years they have diversifed into residential homes for old people. This brings good value and you don't have economic cyles that affect the income," he said.
An increasing appetite among pension funds for certain kinds of non-traditional real estate is predicted by Stroobants. He described it as "a dynamic definition of SRI".
"That combines investment in real estate with moral and social duties to society and you create long duration with stable income which is a perfect match for liabilities," he said. "Why should pension funds not invest in the construction of hospitals, nursing homes or social housing?"
The shift in the balance from company pensions to industry-wide schemes will drive this movement, he said. These schemes are managed on a paritarian basis between employer and employee, giving a greater say in investment strategy to the trade unions.
"Unions put SRI on the agenda very quickly. Now we only need to create the investable vehicles, that's the missing link," said Stroobants. "I think the asset management industry and the pension fund industry have to sit together and develop products which are liquid, marketable and priceable and provide money for this market."