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Pension Funds diversify using non-listed real estate

househunterSmall and medium UK pension funds are increasingly using non-listed real estate to access overseas investment, according to Inrev, a European association for investors in non-listed real estate funds.

Inrev says that UK institutional investment in non-listed real estate is set to grow by 20% over the next three years to £29bn (€34bn) and the main source of this growth will be an increase in non-domestic investments by pension funds.

Non-listed real estate has increasingly become the convenient choice for most small and medium-sized pension funds as they do not have the resources and scale to invest directly. Inrev says that most of them invest in core-diversified vehicles with a small proportion also pursuing high risk/return strategies.

Lonneke Löwik, director of research and market information at Inrev, says: “Most investors use non-listed funds to improve the diversification of their real estate portfolios and, in particular, to access out-of-reach sectors and sectors where they do not have the expertise to invest directly. The fastest growing area is non-domestic property. Helping investors deploy capital abroad will be a key element to the expansion of non-listed funds.”

He adds that pension funds’ exposure to real estate is currently below target but they are now expected to grow to their strategic allocation targets. This means non-domestic – and therefore non-listed – is likely to be one of the significant beneficiaries.

The Inrev UK Investor Universe report shows that non-listed real estate funds dominate the non-domestic universe and, at almost £8bn, account for three quarters of the total capital invested in real estate by UK investors outside of the UK. By comparison, non-listed funds account for 22% of domestic real estate investments. 

In total, UK life and pension funds’ current non-listed real estate universe is estimated to be £23bn, representing 2% of their total assets and 29% of their global real estate investments. UK life and pension funds are estimated to have £80bn invested in real estate. This represents 7% of their total assets. 

Life funds and the smaller pension funds with less that £2.5bn dominate the non-listed real estate universe, although through different approaches. Life funds allocations are evenly split between UK specialist and non-domestic vehicles, while the smaller pension funds mainly invest in UK diversified vehicles, with a small proportion in non-domestic and UK specialist vehicles.

The INrev study was carried out in conjunction with another trade body, the UK’s Investment Property Forum (IPF).

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