bfinance to Institutional Investors: Property Is a Reliable Source of Returns in Uncertain Times

(October 17, 2011) — Property has emerged as a source of stable returns among institutional investors in the UK amid uncertain times of economic and political turmoil, bfinance has asserted. 

According to the firm, the asset class has bounced back from its 2008-09 lows. “Attractively defensive, offering a yield with corporate bond-like income returns and partial inflation hedging, the rationale for investing in physical assets is self evident,” bfinance stated in a release. In June 2011, a net 14% of global institutional investors surveyed by bfinance intended to increase their exposure to real estate over a six month horizon. Over a three year horizon, a net 16% intended doing so.

In comparison, the average UK pension fund exposure to property was 6.2% in 2010. For local authorities, it was around 7%-8%, according to State Street Investment Analytics. Of this, only 0.5% is believed to be invested in global property.

Julian Agnew, Hermes property manager, commented in the release by the London-based financial-services firm: “Hermes and BT have allocated £10 billion to global property, but you need to be a big pension fund to want to diversify overseas and most of the funds have done so via fund vehicles.”

Explaining the restraints institutional investors face in investing in global property, John Hastings, partner at actuarial consultants Hymans Robertson, which specializes in advising UK local authority pension schemes, added in bfinance’s research report: “Global property is a great concept, but harder to execute. It involves dealing with agents which can add layers of fees and you need managers with good local skills.”

“Investors should also do due diligence on the credentials of key partners/outsourcing arrangements, where applicable, with regard to deal sourcing, asset management and property management functions. An understanding of local lease structures and the regulatory regime is also important, as is knowledge of the valuation policy which will impact on how the manager’s track record is portrayed,” commented bfinance Director Vikram Aggarwal in a release.

Additionally, the firm concluded that the willingness to increase exposure to real estate depends on the existing level of exposure to this asset class. “UK investors have currently more scope to invest in real estate than their Swiss counterparts, who are already exposed up to 20% to this asset class. However, the rules for selecting a manager do not change. The key to successful global property investment is sourcing agents with excellent local market knowledge and expertise,” according to a release by the firm.