EUROPE - Pension funds should double their allocation to real estate to combat deficits says property consultancy firm CB Richard Ellis.
The firm said that an analysis carried out in April with the help of Nick Tyrrell of JP Morgan Asset Management revealed that the most appropriate allocation to real estate within a pension fund "is in the order of 10% to 15%". This target compares with the average 6% in Europe.
"It is essential for pension funds to make a greater investment in commercial property if the predicted pensions shortfall is to be alleviated," the consultant said in a statement.
Michael Haddock, CBRE’s Europe director, said he had noticed an increased appetite for real estate among European pension funds, but the portfolio re-balance was likely to be accomplished at the expense of equity and bonds.
"They are significantly keener on real estate this year than last year, they were significantly keener on real estate last year than the year before. I think it is a European trend," Haddock said.
The Italian market is an exception, with local pension funds already committing about 20%. "It is not unreasonable for them to consider themselves slightly over-exposed to that sector," Haddock said.
CBRE said that allowing for re-weighting of existing portfolios and the necessary new investment, this will ultimately direct at least €24bn a year into the real estate market in the EU-15.
"We are not suggesting that people should put money into real estate at any price," Haddock told IPE. But he said that in the medium term the sector would be able to absorb an investment increase because of "unexploited" areas.
"The problem is not one of unavailability of product, it is one of people having a too narrow view of what product means," he said.
Haddock explained that the mainstream idea of real estate investment involves "big shiny offices in a capital city" but opportunities can also come with investments in industrial and leisure property as well as care homes.
He also explained the current European real estate market concentrates on 10 cities like London, Barcelona and Paris and suggested real estate investors consider 25 more cities in Europe with over 1.5m inhabitants.
"A city with more than 1.5m people is a big city, and the fact that investors are not putting a substantial amount of money into those market suggests that in some way the industry is failing to deliver with regards to those locations," he said.
Haddock said that such under-exploited areas offer a "perfectly liquid" investment market.