Real estate remains largest alternative investment for pension funds
European institutional investors sharpened their focus on higher returns in 2009 while striving to keep risk under control, according to the tenth edition of the European Institutional Asset Management Survey.
The findings of the survey, whose main focus is on European pension funds, point to an altogether more positive sentiment compared to the previous year, which has benefited above all riskier asset classes.
“The survey results certainly pick up the drive to recovery and reversion to ‘trend’ by investors as they rebalance their portfolios by reducing cash and show an increased appetite in alternatives,” says Simon Redman, head of product management of Invesco Real Estate, which sponsors the survey. “There is a sense of a return to normality and investors appear resolute about resuming from where they were before the traumas and dramas inflicted by the financial meltdown.”
The fact that investors are looking for higher returns again is reflected in a shift from cash to alternatives. Pension funds started to move down the liquidity scale in 2009 and diversify into alternatives such as real estate, hedge funds and private equity. The survey indicates that this diversification process is likely to continue which is reflected in increased positions in real estate, private equity, hedge funds and commodities.
Over the year, alternatives including real estate bounced back to make up 11.7 per cent of respondents’ portfolios.
“The economic crisis dented confidence in alternatives, but European institutional investors seem to have embraced the sector once again,” says Redman. “Seemingly institutional investors are reasserting their belief in the low correlation of alternatives to the mainstream asset classes.”
Among alternatives, investment in real estate was ramped up, in particular. At 6.6 per cent of investors’ total assets, real estate investment is now at an eight-year high.
“Given the continued growth in real estate’s importance as an asset class, it is clear that it will have a major part to play in future investment portfolios,” says Redman.
All sizes of investors have increased their allocations to real estate, medium investors making the largest increase, so perhaps starting to redress the significant reductions made the previous year.