Study: Institutional Investors Should Be Cautious Allocating to European Property

(June 9, 2011) — Pension funds should not embrace the European property market without some degree of caution, Hatfield Philips International (HPI) says.

The firm, which manages £35 billion worth of commercial property loans across Europe, says that in order to prevent another global property crash, regulators have aimed to limit the amount of credit available for investing. Yet, compared with financial institutions, pension funds do not face the same restrictions and capital rules.

According to HPI director Stewart Hotston: “Whilst investment from institutional investors, such as pension funds, is very good for the liquidity of the commercial real estate market, it is important that they apply a degree of caution so as not to risk history repeating itself, albeit with different actors. The capital rules, which institutional investors such as pension funds work with, are completely different and thus they can treat debt differently when compared with traditional lenders.” Hotston noted that the past five years have been a reminder of how many of the assumptions about assessing value and probability of default are “painfully wrong.”

He added: “The same words of caution should be applied to the retail property funds, whose ability to attract cash in a rising market was on occasions greater than the ability to make prudent property purchases.”

Research earlier this year showed that Germany has replaced the UK as the preferred location in Europe for investment in non-listed real estate funds.

The survey by the European Association for Investors in Non-Listed Real Estate Vehicles (INREV) discovered that compared with last year, when the UK ranked as a top property investment location, the UK fell to fourth place with Germany now the region of choice, as 36% of investors ranking German retail as their preferred intended location and sector for 2011.

“This is a dramatic change in sentiment,” Director Research and Market Information Lonneke Löwik said in a statement. “Over the last two years the UK dominated the rankings with UK retail, UK office and UK industrial/logistics included in the top four most preferred country/sector combinations. While the UK remains well represented in the top ten, investors seem wary of higher property prices and a slower economic recovery in the UK but attracted by growing confidence in the German and other European markets.”

The findings from INREV came from surveying investors and fund managers overseeing 981 billion euros ($1.3 trillion) of assets.