Pension assets in Europe could grow at 9% a year, Koen De Ryck of Pragma Consulting in Brussels told the European Property Strategies conference held by IPD and Global Property Research in Wiesbaden last month.
“On a net cashflow basis, this 9% would mean 6% growth of the investment and 3% growth in contributions. But such figures do not reflect the very high returns obtained over the past 10–15 years of 20% or more. But 9% is growth could be afforded and if this is achieved on annual basis, then pension fund assets could reach E12trn by 2020 and that’s not too far off.” He contrasted this with the E1.2trn invested at the end of 1997. “These projected figures could be on the low side. But the overall effect of such figures would be enhanced capital markets.” He noted that there would be benefits for the tax authorities as the results of this capital growth would mean more taxes paid by pensioners.
He saw the shift to equities, real estate and alternative classes as a necessity. “The focus has been on equities because the returns had been so good, but less so in real estate, but that is one of the next ones to come as part of the shift to alternative investments. This was essential because of the insufficient returns on fixed income, which is no longer going to be as important as it was in the past.” Real estate, alternative investments was going to be a growing area. “But not just because of fixed income returns, it is also because our dynamic pension liabilities have to be covered by dynamic assets as real estate and equities are.” He thought this applied to both defined benefit and defined contribution plans. “Overall the shift to equities and real estate will reduce the costs of providing pensions in the longer term.”
Discussing the future asset allocation in European pension funds, de Ryck reckoned that on average equities accounted for 45% and fixed income for 45%. “The 10% in other is cash, real estate and other alternative investments. In my view with the high level of sophistication, we could see 20% in what I call growth equity – the new economy type stocks. I see 40% in long-term growth in growth plus value in big issues and so on. The 20% in fixed income would be a substantial decrease. The remaining 20% in a combination of real estate and other alternative investments.” But real estate could be different than in the past when it was mostly direct investment, and would be more indirect. But it would be more professionally managed, more transparent and more benchmarked. “Real estate could be as high as 10–12%, with the rest in alternative investments.”
Professor Clemens Kool of the University of Maastricht, discussing the outlook for EMU, said that if Europeans were not able to reach better political integration, the euro would probably not exist 20 years from now. “If you go back in history, previous monetary unions not backed by political integration tended to collapse. They are not viable.” He added that individual countries with problems because of social security or pension liabilities were unlikely to be detrimental to the euro. "When the city of New York was almost on the brink of bankruptcy in the 1970s, it had no impact on national interest rates. Given that an individual country cannot create money, so all it can do to cope with deficits is to borrow long term in the market or raise taxes. The link between excessive deficits and inflation is effectively broken. It might raise the risk premium on government bonds but not affect overall European interest rates.” The problems could spread to neighbouring countries, but should not have an overall impact on inflation, he said.
Property portfolios run by specialist managers in the UK out-performed other types of real estate investor such as pension funds, unitised vehicles and life insurance companies, according to IPD survey results, Alec Emmott of Paris-based Société Fonciere Lyonnaise told the conference. Did this apply elsewhere, he asked. An examination of French IPD data showed that “property companies out-performed other actors as the market came out of recession”.
The reason, he believed, was that “an investment manager in a specialist area will usually out-perform the generalist manager for the same reason that a professional tennis-player will usually beat an amateur player – not because he makes more winning shots, but because he makes less unforced errors.”
In a review of the European property share markets, Hans Op't Veld of Global Property Research in Amsterdam said, propelled by strong returns, cross-border consolidation among property companies was progressing rapidly. “However, only a small number of property companies had sufficient liquidity to maintain a leading role in the industry.” It was the larger, more liquid companies that investors prefer, so the smallest companies would be acquired or taken private again.
“New financial instruments will enlarge the liquidity of these companies further as derivatives on property share indices will be introduced in Europe. We have created a real time index, which is constructed for this purpose,” he said.