Two reasons, mentioned above, are that most real estate holdings confer the advantage of less volatility compared to publicly-traded securities and that asset values tend to track inflation. Low inflationary pressures have modified the utility of the latter variable, but this is made up by a third motivating factor - solid financial returns (income plus capital gains) over the long-term. There is evidence that these have been improving since the early 1990s and, in the past couple of years, fell between the higher returns of stocks and the lower returns of bonds.^{Endnote 116}

The aggregate exposure of pension funds to this asset class was somewhat greater in the 1980s than it is today. As stated at the outset, such investment activity benefited from an inflated boom cycle in all real estate markets during the previous decade. It is well-known that reverberations of the worldwide bust at the decade's end led to severe erosion of asset values, write-offs and disruption of the balance sheets of bank and non-bank financial institutions and institutional investors caught with over-exposure.

Despite owning comparatively few properties, pension funds were not immune to this event. The financial and legal problems besetting OMERS Realty Corporation over the status of holdings and valuations in recent years, for example, are said to have originated in this bust and in the Canadian economic downturn that came afterwards.^{Endnote 117}

One result of this experience was a gradual reduction in pension participation in Canadian real estate markets. This is less obvious in Statistics Canada data for the universe of trusted pension funds (see Figure 4), showing overall asset allocations to real estate and lease-backs to hover at around 2 percent and 3.5 percent between 1986 to 1996. In the Benefits Canada profile of the 100 largest funds (see Figure 5), however, allocations are revealed to have declined precipitously since the recession, from 6.7 percent in 1993 to 4.2 in 1997. Another and more pressing contributor to this drop has also been, of course, strong equity price appreciation in public securities exchanges.

Indications are that real estate began a financial rebound in 1993, enjoying a renewed influx of capital resources from diverse supply sources, including some pension funds. This is certainly reflected in aggregate dollar commitments among the largest funds - rising to almost $19 billion in 1997 - that belie the current observed lows when expressed as a percentage of total assets. These newest asset allocations are attributed to a handful of large public sector pension funds, such as those associated with British Columbia's OCIO. Engagement in real estate investing differs conspicuously among Canada's most sizeable private and public sector funds (i.e., over $5 billion in assets), from OMERS exposure of 12.5 percent to the 3 percent of Ontario Teachers PPB.^{Endnote 118}

Some market analysts and practitioners believe that the market's recovery warrants some restoration of higher levels of pension investment in real estate. Hamilton and Heinkel argue that the average pension portfolio might reasonably include 5 percent in such holdings. More risk tolerant pension fiduciaries might even raise their threshold for this asset class as high as 15 percent.^{Endnote 119}

Models of pension participation

Generally speaking, pension investment in real estate tends to follow a buy-hold-sell pattern in relation to existing properties or property shares that are diversified geographically. Periodic spending on minor or major expansions and refurbishments of these, and involvement in larger-scale developments, also takes place in this process. Portfolio holdings are commonly diversified by property type, though real estate of paramount financial interest is non-residential, such as factory sites, hotels, industrial parks, office buildings, retail outlets and shopping centres. Such large properties imply a commensurate opportunity for allocating substantial assets. Pension funds may also invest in land, some residential housing and infrastructure (though this rare and often treated as a distinct asset class (see Infrastructure: The Newest Asset Class?).

In the past, it was standard practice for pension fiduciaries to buy into office buildings or other commercial complexes within close proximity. This has certainly changed over the years due to the ebb and flow of local sub-markets according to regional economic circumstances. Pension funds are now more likely to diversify nationally and, in some cases, internationally, to obtain risk-adjusted returns from identified boom cycles then unfolding in a given sub-market (e.g., British Columbia, in recent years).^{Endnote 120}