Good Governance for Direct Real Estate Investments by Pension Funds and Investment Foundations

A lack of governance reduces performance – and increases risks

Many direct property investments are still managed using structures that have evolved organically over time. However, what has worked for years is now increasingly reaching its limits – with tangible consequences for costs, controllability and risk exposure:

• Lack of strategic alignment: Investment strategy and property strategy are not consistently aligned; as a result, risk, return and sustainability targets remain non-binding or contradictory.
• Poor decision-making quality: Investment decisions are based on routines, empirical knowledge or individual opinions – rather than on structured proposals, clear KPIs and defined investment processes.
• Unclear responsibilities: The blurring of strategic and operational tasks, as well as of management and specialist roles, hinders effective control and increases the risk of errors.
• Dependency on key individuals: Critical expertise is not systematically embedded but tied to individual people – posing risks to continuity, transparency and compliance.
• Increased reputational and regulatory risks: In the absence of robust governance, traceability and auditability deteriorate; compliance with regulatory requirements becomes vulnerable.

The consequences are significant: losses in value due to misallocation, opportunity costs and inefficient management – as well as increased risks for the board of trustees and the investment committee.

The following role model, which has evolved over time in practice, illustrates a complex application and decision-making process that is organised primarily along hierarchical lines – rather than on the basis of specialist expertise. This results in lengthy processing times and makes the rationale behind decisions difficult to trace and audit.

Modern Real Estate Investment Management (REIM): Governance as a Value Driver

Professional real estate management clearly distinguishes between governance, functional accountability and operational execution. Modern REIM models – such as those based on the GIF standard (Society for Real Estate Research) and other best-practice frameworks – follow three fundamental principles, thereby ensuring governance, transparency and traceability:

1. Decoupling formal hierarchy from functional governance: Decisions are based on defined roles and responsibilities – not on hierarchies that have evolved over time.
2. Structured and transparent decision-making processes: standardised applications, defined KPIs, and clear rules on responsibilities and escalation.
3. Consistent, equivalent management levels throughout the entire lifecycle – from strategy to operational delivery.

• Strategy: Portfolio management (What to do?)
• Tactics: Asset management (How to implement?)
• Operations: Property management and administration (Who is responsible?)

This layered management structure has become widely established and forms an important prerequisite for transparent, audit-proof and sustainable property management.

The following ‘Best Practice Governance Role Model’ is based on the GIF level model shown above. It systematically organises reporting and decision-making relationships according to specialist expertise, roles and committees; the hierarchy of direct reporting lines is not shown.

Clearly defined roles in real estate investment management (REIM) as a foundation

In order to implement good governance principles effectively, clearly defined roles and areas of responsibility are required. The key roles within REIM can be organised as follows, for example: