The role of real estate investments in the portfolios of Finnish pension funds

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Insinööritieteiden korkeakoulu | Master's thesis
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Real Estate Investment and Finance
Degree programme
Master’s Programme in Real Estate Economics
Finnish pension institutions are facing new challenges as the working population of Finland is decreasing while the number of pensioners is increasing. In these circumstances investment assets play an important role in supporting the pension system. As a part of the investment portfolio, real estate is able to enhance portfolio returns and diversify portfolio risk, according to multiple studies. However, there has not yet been conducted a study that examines the allocations to real estate by Finnish pension funds, which especially remarkable in light of the dominance of Finnish pension institutions in both the Finnish real estate and general investment markets. The study aims to analyze the optimal allocations to real estate by Finnish pension institutions. It estimates the optimal allocations to real estate, evaluates the contribution of real estate to portfolio return and risk diversification, and examines the ability of real estate to protect against changes in funds’ liabilities. The analysis is conducted in two frameworks: the Markowitz optimization as the asset-only framework and optimization of surplus return as the asset-liability framework. The data analyzed in the thesis included return indices for direct real estate, private equity real estate funds, listed real estate, general stocks, bonds and money markets for the period from 2001 to 2013. Information on funds’ liabilities was derived from reported to the Finnish Supervisory Authority data on solvency capital, solvency limits and technical provisions of the private sector pension funds of Finland. Results of the mean-variance optimization are in line with multiple studies that were conducted for other markets: real estate can bring substantial return and diversification improvement to a mixed-asset portfolio. Real estate in the form of direct real estate and listed real estate is present in optimal portfolios for all risk levels and proposed by the study allocations are significantly higher than the actual allocations of Finnish pension funds. The results of the surplus return optimization have also shown strong presence of direct real estate and listed real estate in optimal portfolios, which is different from the previous studies that found much closer to the actual allocations.
Falkenbach, Heidi
Thesis advisor
Falkenbach, Heidi
commercial real estate investment, pension fund, portfolio theory, asset-liability management, asset allocation, optimal allocation
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