Standard Life says abolition of MFR will increase attraction of the asset class
Pension funds' holdings in property is set to rise after having fallen dramatically since the 1970s, according to Standard Life.
Property should become a more attractive investment in an era of fewer impediments to the purchase of property and less pronounced economic cycles, according to Andrew Jackson, head of property research at Standard Life.
Factors that will make property more attractive include the impending abolition of the Minimum Funding Requirement (MFR), according to Standard Life. Jackson argued MFR discouraged property investment because the benchmark asset distribution used to determine the rate of interest for valuing liabilities excludes property.
This means that a fund holding property assets risks a fall in the value of the assets without a corresponding decline in the value of the liabilities it supports. Jackson said this could mean its solvency margin is eroded. Once MFR is abolished, property could be given a greater emphasis by actuaries in strategic asset allocation recommendations for pension funds, he said.
Another factor that could encourage pension funds to increase the proportion of property held is the increasing availability of property across Europe. Jackson said a number of pan-European property funds have been launched over the past year.
This will have the benefit of allowing fund managers to develop a more diversified portfolio as well as a greater choice of property investments as markets in different European countries are not synchronised. The expansion into European markets will be further encouraged by the way that the markets are opening up, according to Jackson.
He said: 'The increasing transparency in many of these markets, the reduction in transactions taxes and the relaxation of other previously burdensome legislation relating to property ownership will further attract investors.' He also cited the increased availability of information as making investment in property easier, pointing to the establishment of property databanks in a number of countries by IPD, a leader in the provision of property portfolio benchmarking.
Property is also a good investment at the moment because it delivers relatively attractive yields and it continues to be less volatile than other asset classes.
Jackson said: 'Since 1980, most of the outperformance shown by equities, and all of that shown by bonds, has been due to investors repricing these asset classes which has pushed yields lower. As a result, property now offers investors a significantly greater yield margin over the other two asset classes.'
Property has become more liquid in recent months with the increased use of quoted property companies as a proxy for the underlying property market, according to Jackson.
He pointed out that there is evidence that these companies have become more closely linked to the direct property market. Dealing with property companies obviates the need to get involved with the more burdensome and expensive aspects of the property market, he added.
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