Dutch pension funds should have a much bigger property allocation than the current 9% industry average, Ortec Finance has argued.

During the annual research seminar of the Association of Institutional Property Investors (IVBN) and real estate investor VBA in Amsterdam last week, Loranne van Lieshout, senior consultant and partner at Ortec Finance, said property usually scored very high in scenario analyses of asset-liability management studies (ALM) for a strategic investment mix.

Drawn on ALM outcomes, a 20% or even 25% stake in property would be justified, she concluded. Real estate offered added value for the short term in particular, she said, with the benefit levelling off over the long term.

Van Lieshout presented the outcome of a mini-poll of seminar participants, which suggested that liquidity and the limited availability of quality assets and locations were obstacles for larger allocations.

According to regulator De Nederlandsche Bank (DNB), Dutch pension funds have invested 9% of their portfolios in real estate on average.

Sector schemes usually have a bigger allocation than company pension funds, with more than 6% on average.

The consultant emphasised that property had proved to be significantly less volatile than equity – 7% for property versus 20% for equity – during the past 30 years, adding that fluctiations in property value were also decreasing.

She also cited the low correlation with equity, but noted that correlation increased over time, as both asset classes were driven by the same economic factors.

Van Lieshout said that the correlation with inflation was also more favourable than with equity, and improved further with a longer investment horizon.

However, she emphasised that real estate was not suited for day-to-day interest-rate management “as the expected cash flows as well as risk premium on property were too uncertain”.

“The value of property is affected by many more factors than just interest rates,” she explained.

The 16 respondents in the mini-survey had indicated that a lack of reliable historical data, insufficient transparency and concerns about concentration risk were reasons for institutional investors to not further extend their property holdings.

Van Lieshout underlined the importance of diversification across assets and regions and made clear that diversification decisions must be taken in the context of the entire investment portfolio.

The Ortec partner put the liquidity argument into perspective by pointing out that most pension funds could finance their liabilities with income from contributions.

However, she acknowledged that liquidity was necessary as collateral for interest rate derivatives.

“This is to become even more urgent as soon as the EMIR regulations for central clearing are also to apply to pension funds, as collateral must be deposited in cash rather than government bonds,” said Van Lieshout.

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