UK - UK pension funds would be better off by around £44bn if they had stuck to the allocation of 20% to commercial property, the norm in the 1980s, a Pricewaterhouse-Coopers seminar in London was told.
A PwC survey of the top 200 pension schemes in the UK showed an allocation to property of just 3.7%, with one third having no allocation at all. PwC estimates that those who do have an allocation are putting around 8% of their portfolio into property.
Interest in property investments is increasingly driven by a desire for diversification and Myners’ recommendation for pension funds to consider a wider range of assets, Natalie Winter, senior manager in PwC’s investment consulting practice, said.
But investors need to consider carefully the risks of the asset class. Like equities, property has a low correlation with pension liabilities, though this can be minimised.
“With a carefully constructed portfolio it is possible to make it more bond-like,” she explained. “Property with long leases and quality tenants such as government departments can in fact be a good match for liabilities.”
Volatility and liquidity are also issues, though volatility is lower than for equities. Property investment through pooled funds is also subject to manager risk.
During a 10-year period from 1994 to 2003, data from the CAPS Pooled Pension Fund Survey showed an average dispersion of returns of 4.2%.But the differing characteristics of the various types of property – office, retail and industrial – need to be considered.
The office sector is highly cyclical, with the highest capacity for bond-like income; retail has a more moderate cycle with fewer peaks and troughs, but needs more active management expertise; and industrial is high yielding and popular for income seekers, but yields have come down over the last few years.
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