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Defined contribution pension funds that combine private and listed property in investments consistently generate superior returns compared with portfolios without a blended approach, according to new research sponsored by the European Public Real Estate Association.
In its annual Insight presentation in Amsterdam on 14 January, EPRA executives showed figures that showed that a UK pension fund portfolio that combines a 30% international property shares with non-listed funds delivered an annualised total return of 7.5% p.a., or 0.9pts better than more than a portfolio with no real estate stocks. The data were based on 15 years of performance data compiled by consultants Consilia Capital and The Townsend Group.
“No matter what period we looked at and irrespective of the property cycle, we found that an allocation to the listed sector enhanced the returns of the real estate portfolios of defined contribution pension funds, Consilia Capital MD Alex Moss told the event.
“A compelling body of research shows that by sticking to traditional non-listed strategy investing institutions miss out on superior returns, as well as the benefits of liquidity and efficient pricing that come from integrating listed property into real estate allocations.”
Nicholas Cooper, principal with The Townsend Group, added: “It is well understood that private real estate can be a beneficial component of a multi-asset portfolio, primarily due to the diversification that it provides. Real estate solutions within Defined Contribution schemes often require an enhanced level of liquidity. This study finds a blended portfolio, with a majority of direct real estate exposure through private real estate funds, can provide
attractive risk-adjusted performance. The diversification potential is also largely retained, especially when considering typical institutional allocations to the asset class.”
The study, which covers June 1998 to June 2013, showed that a 70/30 blended portfolio generated a 13.6% outperformance in returns compared with non-listed funds. Fraser Hughes, Research Director EPRA commented: “The results of the research are clearly in line with the findings of the Maastricht University report on global pension fund performance issued in 2012 – that investors who ignore the listed real estate market seriously risk underperforming
those that embrace it. It only goes to bolster our opinion that listed real estate should form a material portion of all investors’ allocation to property.”
The liquidity that stocks provide, lower transaction costs and ease of diversification by sector, regionally and globally are among the reasons DC pension funds are warming to the listed real estate sector, according to a separate EPRA survey (Pension Fund Real Estate Investments) released in September and prepared by Consilia and Andrew Baum of Property Funds Research. The UK’s National Employment Savings Trust indicated last year that it will remark one-fifth of total investment to Legal & General’s Hybrid Property Fund, which invests 30% of its assets in a global real estate equities. NEST, established under reforms introducing automatic enrolment to the UK workplace DC pension schemes, expects assets to rise to as much as £150bn by 2030.