EUROPE – European pension fund exposure to real estate is expected to increase from five percent to 10%-15% in the next five years, according to LaSalle Investment Management.
Up to now, European real estate has been considered a minor asset class relative to bonds and equities, but LaSalle believes there are a number of factors prompting investors towards real estate.
They are the continued corrections and disappointments in equity markets as well as pressure on pension funds to secure higher yields together with some form of inflation hedge as most European leases offer some form of indexation or linkage to market values. And then there is the positive real estate yield margin over the cost of debt.
At present the average exposure of European pension funds to real estate is about five percent, although there is no standard allocation amid the countries. Swiss pension funds allocate an average 15% to real estate, while in France and Spain the allocation is around two percent. In Germany, the UK and the Netherlands, allocation is between five percent and 10%.
High current exposure to cash, bonds and equities, however, is being re-examined by European pension funds - a key element will be achieving better return on assets or at least meeting growth in liabilities.
The property market has recently seen impressive returns. In Europe from the end of 1999 to 2002, real estate returns have averaged just under eight percent a year compared with –19% a year for equities.
Admittedly, property may not perform as well over the next three years - LaSalle expects returns of six to 10% a year – but this is still above future liability growth in Europe, which is estimated at matching economic growth plus inflation at about five percent a year.
In addition to competitive returns, real estate offers diversification. Explains Gerry Blundell, head of European strategy and author of LaSalle’s report “The Case for Europe”: "Real estate offers a potent source of diversification from equities and bonds for two reasons: first it offers truly local exposure, reflecting the fortunes of the economy in which it is situated, and secondly, its form of contract means that income stream is more predictable than equity dividends."
LaSalle Investment Management is a member of the Jones Lang LaSalle group with more than 23.3 billion dollars (19.78 billion euros) of public and private assets under management.
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