A recent survey into institutional investment in property1 has found that the available benchmarks reflect the true market situation, despite a lack of clarity both in the questionnaires used to obtain data and the categories used to report the findings. The study, by DTZ Research on behalf of Royal & Sun Alliance, also uncovered a wealth of data on the extent of indirect investment in property by UK insurance companies and investment funds.
The aim of the DTZ survey was to investigate whether property holdings are under-recorded in benchmarks because of a failure to account for exposure to indirect property investment. To do this, DTZ applied a three-pronged approach. It surveyed the top 75 pension funds and 25 insurance companies to establish their current property holdings, both direct and indirect. It also contacted the major collecters of data on property holdings – ONS, IPD, WM and CAPS – to find how they gather their data, specifically looking at how the questionnaires were structured and worded. Finally, a sample of funds were surveyed to discover how they interpret the questionnaires they complete, and how they allocate their property holdings among the categories listed.
In their annual survey into property holdings by pension funds and insurance companies, the researchers found indirect investment is firmly established in the UK market. Half of pension funds and just under half of insurance company funds responding to the survey indicated some exposure to indirect property assets.
For several years, exposure to indirect investment in property has increased overall as investors have taken a more active approach to property investment. DTZ’s own research shows that UK segregated pension funds hold more than £5bn (e7.9bn) in indirect property vehicles. Indirect investment is often more cost-effective than direct investment, because it does away with the need to employ property specialists, and also allows smaller funds to benefit from investment in larger property assets that would be impossible to hold directly. In the late 1990s, the variety of indirect holdings increased dramatically, with such vehicles as limited partnerships, property unit trusts (PUTs), property index certificates, property index forwards and other types of unitised property vehicles.
The most popular vehicle by far is the limited partnership (LP) – the survey found that some 90% of property exposure held indirectly was through LPs. By contrast, insurance companies had only 3% in PUTs and pension funds 7%. Funds that have exposure to limited partnerships participate on average in four partnerships. And LP partnerships are set to hold their ground in the investment profile – two-thirds of fund already investment in LPs were planning to increase exposure during 2001.
However, despite the growing popularity of indirect investment in property, the major data collectors do not request information specifically on these holdings. The Office for National Statistics (ONS), the government agency that collects data on institutional investment, asks specifically about direct investment in property, broken down into several categories, but property held in indirect vehicles is categorised under a variety of headings and it is not possible to separate it out. LPs, for example, are included as unquoted securities. However, there is a separate category for pension funds’ investment in PUTs.
With WM, whose All Funds Universe is the largest available performance measurement universe of UK pension funds, representing more than 75% by value, there is again no specific category for LPs. Property investment is broken down among three categories: direct property, PUTs and property derivative instruments.
CAPS offers a range of services similar to WM, focusing on pension funds and insurance companies. It breaks down property holdings into PUTs, direct property and property shares. The first two are included within total property, but property shares are included with UK equities.
IPD offers a performance measurement service focusing on property. It collects data on direct holdings,and for companies with direct holdings it also looks at LPs, PICs, PIFs, and PUTs, as well as mortgages, debt, cash and property company shares. However, it holds no data on companies with only indirect holdings.
In looking at indirect investment in property, the vagueness of the questionnaires is only one issue. DTZ found that there is also some confusion within the fund managers themselves. While property specialists within the funds were fully aware of direct holdings, information on indirect holdings was often held by equities teams who were heavily involved with their structuring. In addition, while the property specialists were comfortable with the IPD forms, they were less sure with the forms issued by WM, CAPS and ONS. On the other hand, central administrative staff were on firmer footing with the WM, CAPS and ONS forms than they were with the IPD forms.
The ONS data, based on the broadest survey of UK institutional investors (covering more than 80% of the market), found that pension fund exposure to directly held property in the UK amounted to 3.6% of total assets in 2000, up from 3.2% the previous year. Adding in PUTs, the weighting rose to 4.4%, up from 3.8% in 1999.
The WM All Funds Universe also provides a property weighting: it reveals 5.0% at the end of 2000, up from 4.4% the previous year. However, this includes property held overseas and property held in indirect vehicles.
DTZ hypothesises that the difference between the ONS and WM figures reveals the level of indirect investment in property. So, for 2000, a residual value of £5.2bn represents indirect property investment (excluding PUTs). This correlates well with DTZ’s own research, which estimates current holdings in LPs at around £2.5bn and £2.7bn in other vehicles such as joint ventures, PICs and PIFs. Therefore, despite the difficulties in the collection and reporting of data, there seems to be no significant under-reporting at present.
1 “Indirect investments”, Research Report, Royal & Sunalliance Property Investments

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