Mark Fawcett, CIO at the National Employment Savings Trust (NEST), has argued that property and real assets will 鈥減lay a key role鈥� in the UK鈥檚 reformed defined contribution pensions market.
Fawcett, who leads the investment team at the state-backed DC pension scheme, told an audience of real estate fund managers that the UK market should look to Australia to see where the industry was headed.
鈥淭hat is where we will be in 20, 30 years,鈥� he told the IPD/IPF Property Investment Conference in Brighton on Thursday. 鈥淭he asset management industry has grown massively and the demand for real assets has grown massively as well.鈥�
Fawcett was responding to a question around the recent removal of compulsory annuity purchase for DC pension members in the UK.
He said: 鈥淲e are going to see a big growth in the drawdown market in the UK. I think drawdown market needs to innovate massively鈥� and I think real estate is going to be a key part of that.鈥�
NEST, designed to support the UK鈥檚 auto-enrolment pension reform of 2008, reached more than one million members this year and has a growing asset base. The DC pension fund has established a 20% allocation to real estate, of which 70% is in unlisted UK property and 30% in global REITs.
鈥淥ur key risk is actually liquidity risk and it鈥檚 not the liquidity coming out, it鈥檚 the liquidity going in,鈥� Fawcett said.
鈥淏ecause our cash flows are so strong, we need to get money into the market and we work very closely with our manager鈥� At the moment they can handle that quite easily, because we are relatively small, but over time that鈥檚 going to become a more important communication.鈥�
Fawcett said this is why NEST adopted a hybrid unlisted/listed approach. 鈥淚f the direct market doesn鈥檛 have the liquidity, then we can always put it into the listed market,鈥� he said.
Liquidity was an issue that arose a number of times during the conference, and Fawcett questioned some of the assumptions around the so-called 鈥榣iquidity risk premium鈥� 鈥� of generating superior risk-adjusted returns if an investor can lock up capital for a period 鈥� often associated with real estate.
鈥淭hat illiquidity risk premium varies massively through time,鈥� he said. 鈥淵ou really earn it when when you are buying in 2008, 2009, when no one else wants to provide the liquidity.
鈥淣ow, if it exists, it鈥檚 marginal at this point in the cycle. [It is the] same with infrastructure 鈥� everyone is chasing infrastructure assets and returns are going down.鈥�
