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RESEARCH

Top1000funds.com survey: funds favour domestic property

Funds are looking to increase their allocations to property, with direct ownership of unlisted pooled-property funds the most popular way of gaining exposure, a Top1000funds.com global property survey reveals.

The survey shows funds have an average exposure to property of 9.5 per cent of their overall portfolios and would most likely move funds from equities and bonds to increase exposure to the asset class.

Most of the funds surveyed indicated their allocation to property would either stay the same or increase. While they had long-term plans to increase allocations to non-domestic property, funds still demonstrated strong home bias when it came to property.

Funds that indicated they would increase allocations to property on average would do so by 10 per cent to domestic property, compared to an average increase to non-domestic property of 5.6 per cent.

When it came to investing in property, funds were looking for like-minded investors with long-term time horizons.

“The ideal way to invest in non-domestic property for us as a pension fund would be a non-listed leveraged or very low leveraged fund with a limited number of participants, preferably other long-term investors,” one senior investment staff member told Top1000funds.com.

Conducted in the later part of 2011, the survey garnered responses from 54 funds in 14 different countries representing almost $1 trillion in combined assets under management.

Respondents included Canada’s Alberta Investment Corporation, sovereign wealth funds the Korean Investment Corporation, Ireland’s National Pensions Reserve Fund and Pensioenfonds Vervoer from the Netherlands.

More than 70 per cent of respondents say they plan to diversify into non-domestic property, with the majority seeing little difference in the global approach they take to equities and bonds and the strategy they are adopting in property.

Despite this, property portfolios still have some way to go before they match these diversification goals as the median allocation of property assets was 85 per cent domestic and 15 per cent non-domestic.

The continuing home bias towards domestic property can be seen in the context of last year’s risk-off environment.

The majority of funds consider non-domestic property to be higher risk than the domestic variety. But they also indicated that the rewards were potentially higher in non-domestic property.

Funds also seem more confident about investing in their own backyards. When asked if they had strong knowledge about non-domestic property, the most popular response was “somewhat/neutral”

The vast majority of funds saw the main benefits of investing in non-domestic property as increased diversification followed by increased risk/adjusted returns.

There was also a number of ways funds were choosing to access the asset class. The most popular was direct ownership of unlisted pooled-property funds, with 20 per cent of investors indicating they used or would use this method. This was followed by a fund of listed-property securities or real-estate investment trusts (REITs), with about 14 per cent of investors preferring this method, 11 per cent each going for direct ownership of listed-property securities or REITs and exposure through property debt.

When it came to selecting a manager, funds indicated that they on average ranked investment process as the most important feature followed by experience and performance.

The size of the fund and a consultant’s ranking were the least important criteria for manager selection.

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