Spanish pension funds have only fractionally increased their allocations to real estate over the last decade but Spanish property funds have enjoyed a boom and are now looking at eastern Europe as residential property prices cool off in Spain.

But those property funds seeking to invest outside Spain may also base those funds abroad since Madrid does not exactly offer fiscal encouragement to national funds wanting to invest internationally.

Xavier Bellavista, investment consultant at Mercer Human Resource Consulting in Barcelona, reports that overall Spanish pension fund assets in real estate have only increased from 1% to 2.7% during the last ten years (1996-2005). In contrast fixed income and liquid assets have dropped from 92% to 57.5% and variable income has increased from 7% to 37.9%.

Mercer calculates that last year total pension fund assets in Spain included 17.3% cash, 40.5% fixed income and liquid assets in euros, 26.5% variable income in euros, 11.4% variable income in other currencies, 2.7% in real estate (mainly in Spanish property funds) and 1.7% in mutual funds.

Figures from Inverco, the Spanish funds association, show mid-year figures of 3002 funds administered by 88 entities with assets valued at 73,560 million euros, an increase of 10.59% in a year. The top three pension fund managers are the banking groups BBVA, La Caixa and Grupo Santander.

The latter runs 304 pension funds with total assets of 8,379m euros, the third largest, but its real estate funds are by far the biggest in Spain. Carlos Zamora, deputy director general of Santander Real Estate, says that Santander's pension funds' property holdings are divided between the group's own real estate funds and many others.

"The biggest fund which we administer, Santander Banif Inmobiliario, has 4,000m euros of assets," he says, "This represents half of the Spanish market and 100% of its investment is in Spain of which 50%, as regulations require, is in licensed dwellings. The rest is diversified between offices, commercial centres, retail premises, industrial space and so on. We administer about two million square metres including over 8,000 rented apartments and 37 office blocks.

"We have an important geographic diversification and although Madrid and Barcelona are the main cities, we have other investments, mainly dwellings, all over Spain. "Our net gains during the last six years have been between six and seven per cent per annum.

"Prices in the residential market at the moment are at their maximum and we think there will be a deceleration with more modest growth. But we don't think prices will fall."

He explained that Spanish government regulations make it difficult to realise foreign investments from Spain so Santander is establishing the Santander Real Estate Investment Fund in Ireland. "Its objective will be to invest in Europe and countries with consolidated economies like France, UK, or Germany but also in eastern European countries. This new fund will start to invest at the end of the year and we expect about 30% to be invested in eastern European countries like Rumania, Poland, the Czech Republic and others."

Grupo BBVA is the Spanish leader in pension funds with assets of around 13,741m euros. Javier Barada, assistant director of Grupo BBVA's funds department, explained that that BBVA's pension funds only invest a small percentage in property because of government rules insisting on liquidity.

"About half of our property investments are in our own BBVA property fund. We are now starting to look away from Spain for property investments and considering the Far East, Russia, Poland, Hungary, candidate countries for the European Union and even Germany. There are new markets there."

The banking group's property fund, BBVA Propiedad, has over 41,000 participants - including BBVA's pension fund - and assets of 2,014 million euros. The portfolio, mainly in Spain, includes a total of 6,585 units with 440,000 sq. m. of space rented out. This comprises 2,284 apartments, 2,670 garage spaces, 90 offices, 76 commercial premises and 1,447 warehouses.

Last year BBVA Propiedad invested €307m in real estate to bring its direct property investment to 60% of its total. With forecasts that Spanish property prices will stagnate, BBVA fixed it sights on dwellings in seven major urban areas where there is a strong demand for rented accommodation as well as offices.

The targeted cities were Madrid, Barcelona, La Coruña, Vigo, Las Palmas, Castellón and Alicante. This year BBVA expects to maintain an annual yield of 7%.

Juan Carlos Maeso, director of BBVA's property funds, says he is adopting a more pan-European outlook. "The Spanish economy is starting to diversify in Europe, especially in Germany, Poland, Hungary and other eastern countries planning to join the EU."

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