How do institutional pension managers consider real estate

Purpose - The asset allocation decision for a pension portfolio needs to consider several, sometimes conflicting, aspects. Most pension managers use models and processes that are developed for the traditional asset classes for analyzing this problem. The purpose of this paper is to investigate how real estate is included in this process, for what purpose and how the real estate portfolio is constructed. Design/methodology/approach - Seven individuals responsible for the asset allocation process were interviewed, and their responses were analyzed with regards to organizational options and their real estate strategy. Findings - It was found that real estate is held for three different purposes, risk diversification, inflation hedging/liability matching and return enhancement and that the allocation has increased over time. The allocation strategy has evolved at least in part in conjuncture with the organizational structure set in place to overcome real estate market frictions. Research limitations/implications - The interviews were geographically limited to pension funds domiciled in Sweden and Finland. Practical implications - It is concluded that the organizational capabilities of the pension fund of handling real estate is an important consideration for the ensuing real estate portfolio. Originality/value - The originality of this paper lies in that it is based on interviews with individuals who are responsible for the asset allocation decision at large pension funds. The findings of the paper identify areas of interest for future research.