New study by Pensions Institute finds that thanks to auto-enrolment real estate investment in DC schemes could stand at £170 billion by 2030

Several new DC schemes designed for auto-enrolment have selected real estate as the first illiquid or ‘alternative’ asset class to be incorporated as a core component of default funds, with an average weighting of 10%. Default funds are likely to be used by the majority (more than 90%) of scheme members and with the projected growth of the DC market in the UK, thanks to auto-enrolment, it means that if this trend is adopted across the market real estate assets under management (AUM) may be worth £170 billion by 2030.

Published today, Returning to the Core: Rediscovering a Role for Real Estate in Defined Contribution Pension Schemes is the first comprehensive independent academic study to investigate the role of real estate investment in the new world of auto-enrolment.

Once considered a core asset class alongside equities and bonds, since the 1980’s real estate has been reclassified as an alternative asset class and investment allocations declined with allocations standing at 0% to 5% for most DC schemes.

The study considers the barriers to real estate investment in DC pension schemes (which include pricing, liquidity, cost and communication between DC and real estate investment professionals), reviews the background to auto-enrolment and considers the future.  The study concludes that many of the barriers to investment can be overcome, as evidenced by the recent 20% allocation by NEST in both its principal and ethical default funds to property and notes a trend of increased real estate investment since auto-enrolment by DC schemes.

The study also found that eight or, possibly, nine of the top 10 providers in the auto-enrolment market currently use their own in-house funds for real estate investment, meaning that at present it is not an open market for third party asset managers.

Whilst the report doesn’t seek to make definitive recommendations, it does raise a number of questions for DC providers and real estate managers to consider.  It suggests that a cross-practice working group bringing together experts from the DC auto-enrolment and real estate management fields would be well placed to address the issues identified by the report and find workable solutions.

Returning to the Core: Rediscovering a Role for Real Estate in Defined Contribution Pension Schemes was commissioned by the Investment Property Forum (IPF) and co-funded by them with the Association of Real Estate Funds (AREF), the European Public Real Estate Association (EPRA) and the Institute & Faculty of Actuaries (IFoA). Copies of the full or short versions of the report can be found here.

Comments from the authors and sponsors of the report:

 Dr Debbie Harrison one of the authors of the study said:

“The research identified a very strong role for real estate in DC default funds going forwards. However, it also demonstrated significant disconnections between the objectives and understanding of professionals in the two markets. Moreover, at present this is not an open market for third party asset managers because most of the major providers of schemes use their in-house funds exclusively.”

 Alex Moss spokesman for the Investment Property Forum (IPF), sponsors of the report, commented:

“We hope the publication of this research succeeds in the aim of increasing the awareness of the benefits of real estate to the pensions industry and, similarly, improving the understanding of real estate practitioners of the issues faced by pension fund managers and consultants in making asset allocation decisions for DC schemes.” 

 John Cartwright, of co-sponsor the Association of Real Estate Funds, said:

“Real estate is a real asset which can offer an important blend of relatively high income return and growth in capital value. Unlisted funds provide flexibility in accessing the returns and diversification benefits of different types of real estate to balance risk in a portfolio.

“Benefits such as these make real estate an attractive addition to a pension scheme portfolio throughout the entire member lifecycle. The findings of this report are an encouraging sign that it can once again be considered a core asset class rather than an ‘alternative’ asset within the growing DC pension market.”

 Fraser Hughes, from co-sponsor the European Public Real Estate Association (EPRA), commented:

“It is clear that, as the DC market grows going forward, the role of real assets and real estate will become ever more important. The investment characteristics of the listed real estate/REITs sector will offer savers transparency, broad diversification across regions, countries and property sub-sectors, attractive dividend yield coupled with the potential for capital growth, professional managed top quality real estate assets in a cost-effective liquid vehicle. NEST’s decision to invest 30% of its real estate allocation in global listed real estate/REITs is a strong example of this.”

 Philip Booth from the Institute and Faculty of Actuaries (IFoA), commented:

“Given the background of so much change in recent years, this research is most welcome. It will assist the actuarial, investment and real estate professions in understanding the needs of pension fund investors and how the various approaches to real estate investment fit into the new investment environment.”

ENDS

 Editorial notes:

A full or short version of the study is available on request from Karen Wagg at the IFoA

Media contacts: 

• IPF - Pam Craddock, Research Director - 020 7194 7925
• IFoA - Karen Wagg, Media Consultant - 077 255 58 551 or 020 7632 1452
• AREF - Navdeep Sidhu - 020 7269 4677
• Pensions Institute - Professor David Blake, Director
• EPRA - Fraser Hughes, Director - +32 2739 1013

About the Pensions Institute at Cass Business School

www.pensions-institute.org

• The Pensions Institute conducts research and provides expert advice on all aspects of pensions. Established in 1996, it was the first academic research centre in Europe to focus exclusively on pensions.
•  The Pensions Institute is unique in bringing together internationally renowned experts from across many different disciplines - including economics, finance, insurance, actuarial science, accounting, corporate governance, law and regulation.
• This interdisciplinary approach enhances strategic thinking towards the development of new solutions to the complex pensions challenges facing states, corporates and individuals, and fosters research and knowledge sharing.

About the Association of Real Estate Funds

www.aref.org.uk 

• AREF currently has around 70 member funds with a collective NAV of around £40 billion under management and includes pooled property vehicles promoted by the UK’s leading fund managers.
• The Association acts as the representative body for the unlisted real estate funds industry, irrespective of domicile, fund structure, sector, or asset type, particularly on tax and regulatory matters.
• AREF promotes transparency in performance measurement and fund reporting through the AREF Code of Practice, the AREF/IPD UK Quarterly Property Fund Index and the AREF/IPD Property Fund Vision.

About the European Public Real Estate Association

www.epra.com

• The European Public Real Estate Association – is the voice of the publicly traded European real estate sector. With more than 200 active members, EPRA represents over EUR 250 billion of real estate assets and 90% of the market capitalisation of the FTSE EPRA/NAREIT Europe Index.
• Through the provision of better information to investors, improvement of the general operating environment, encouragement of best practices and the cohesion and strengthening of the industry, EPRA works to encourage greater investment in listed real estate companies in Europe.

About the Institute and Faculty of Actuaries

www.actuaries.org.uk

• Actuaries provide commercial, financial and prudential advice on the management of a business’s assets and liabilities, especially where long term management and planning are critical to the success of any business venture. They also advise individuals, and advise on social and public interest issues
• Members of the IFoA have a statutory role in the supervision of pension funds and life insurance companies. They also have a statutory role to provide actuarial opinions for managing agents at Lloyd’s.
• Members are governed by the Institute and Faculty of Actuaries. A rigorous examination system is supported by a programme of continuing professional development and a professional code of conduct supports high standards reflecting the significant role of actuaries in society.
• The IFoA is available to provide independent expert comment to the media on a range of actuarial- related issues, including enterprise risk management, finance and investment, general insurance, health and care, life assurance, mortality, and pensions.

About the Investment Property Forum

www.ipf.org.uk

• The Investment Property Forum has over 2,000 individual members drawn from a wide range of different professional communities, including accountancy, banking, fund management and surveying. 
• The Forum’s objective is to enhance the understanding and efficiency of property as an investment, including public, private, debt, equity and synthetic exposure, for its members and others in the wider business community, including government, by:
  • undertaking research and special projects (including consultations) and ensuring effective communication of this work;
  • providing education (through a Programme run in conjunction with the University of Cambridge Institute of Continuing Education); and
  • providing a forum for fellowship, discussion and debate amongst its members and the wider investment community. 
• The IPF Research Programme 2011-2015 is funded through sponsorship from 22 industry organisations and publishes regular papers and surveys on property investment topics. 
• The IPF is a member of the Property Industry Alliance, whose members include AREF, the ABI, BCO, BCSC, BPF, RICS and ULI.  The Alliance was set up to tackle major property issues in a co-ordinated way, whilst allowing member organisations to retain their own separate identities and focus. 
• For further information, visit the IPF website: www.ipf.org.uk