UK – Aberdeen Property Investors (API) has suggested that with property set to outperform other asset classes over the next five years, pension funds should increase their exposure to 15% of the overall portfolio.

In a decade which has favoured equities, average pension fund property exposure in the WM All Fund Universe is currently at 5.6% compared to 9.1% in 1990. Yet over the last five years, property returns have generated 88% more return than from equities.

According to the Watson Wyatt 2001 manager survey, property is set to be the highest performing UK asset class over the next 10 years.

“The vast majority of UK pension funds have failed to capitalise on the recent performance of property, a particularly expensive omission over the past two years given the negative returns from equities,” says API.

Property returned 7.5% in 2001 according to the IPD Monthly Index, comparing favourably with 3.9% from gilts and –13.3% from the FTSE All Share Index.

Given such poor equities performance and the fear that investment returns will not match liabilities, API believes that despite property’s continued outperformance for the last five years, pension funds have failed to exploit property because its attributes as an asset class remain widely misunderstood.

It maintains that with property yields offering a significant risk premium over gilts, its relative pricing appears cheap. “With income a key component of returns, property’s yield, coupled with an expectation of rental growth as the economy strengthens, justifies the consensus view that future performance will be strong.”