Pension funds are being advised to exercise a “degree of caution” when approaching property market investments.

Hatfield Philips International, which manages some £35 billion of commercial property loans across Europe, said that many pension funds have been increasingly significant investors in the commercial property sector.

However, the firm’s underwriting and monitoring team is advising funds not to repeat the mistakes banks and the securitisation market made, which contributed in part to the global property crash.

Regulators and the markets have, effectively, constrained the amount of credit available for investing and ensured that investment is more prudent to avoid a repeat of the crash. However, Hatfield Philips said pension funds do not have the same constraints and capital rules as those financial institutions covered by bail outs, Basel III or Solvency II.

Therefore, the firm is urging pension funds to ensure they carry out full due diligence on property investments. Director Stewart Hotston said that while investment from institutional investors, such as pension funds, is good for the liquidity of the commercial real estate market, it is important they apply a degree of caution.

“The capital rules, which institutional investors such as pension funds work with, are completely different and thus they can treat debt differently when compared with traditional lenders. However, if we’ve learnt one thing from the last five years it’s that many of the assumptions about assessing value and probability of default taught in text books are painfully wrong and new entrants are well advised to take nothing for granted.”

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