The share of real estate in pension portfolios has been increasing over time. The rationale for this increased allocation has often been the investors’ desire for stable returns, which has translated in a sustained interest for multi-family properties. While much research has documented the role of real estate in diversifying a mixed-asset portfolio, focusing on diversification benefits only is not sufficient as the primary objective of pension funds is to meet their future liabilities. Though some studies that analyse the benefits of real estate in an asset-liability management context exist, they typically rely on data that cover two or three decades only. Hence, there is a lack of evidence on whether real estate is useful in a pension portfolio when other economic environments are considered. Such analysis requires the use of much longer returns time series, which seldom exist for real estate. In a recent paper (“The role of multi-family properties in hedging pension liability risk: long-run evidence”), we intended to fill this gap and provide for a better understanding of the benefits through time of holding income-producing residential real estate in a pension fund portfolio.

Our study takes advantage of a unique dataset for Sweden spanning 145 years to investigate the role of multi-family properties in hedging the main component of pension liabilities; namely wage growth. For these investors, a potential benefit of holding multi-family properties is that residential rents should be closely related to wage inflation as higher wages permit households to afford higher rents. All else being equal, higher rent growth will positively impact upon both real estate income and capital returns. This is a desirable feature for an asset class in a pension portfolio, as a positive correlation between assets and liabilities reduces liability settlement risk.