Property fund managers used to have a fairly stark investment choice: they either bought buildings or property unit trusts.

Today, they have a widening selection of indirect routes into the asset class: more property unit trusts, limited partnerships and index-linked derivatives.

"Even the most conservative of clients is thinking of indirect investment. It's a real change in the market," notes David Hunter, chief executive of Aberdeen Property Investors.

Indeed, half of the UK's institutional investors have already gone down this route and the rest are thinking about it, according to a study carried out by DTZ for Royal &Sun Alliance Property Investments.

It estimates that UK pension funds now hold a quarter of their real estate assets, £11.3 billion sterling, indirectly.

The growing popularity of the indirect route is easily explained. Direct property holdings are lumpy to buy, illiquid, and expensive to manage. For smaller funds, indirect vehicles are a tax-efficient way of buying exposure to asset class.

"Many funds don't have sufficient allocations to make it worthwhile to hold property directly. Today, if you have £50-£60 million it is much better to go down the indirect route through pooled vehicles.

"You get a better spread of risk and profession al management whose lives are dependent on performance," says Andrew Strang, managing director of Threadneedle Property Investments.

Another factor fuelling the growth of indirect investment is that property fund managers have become less reluctant about putting clients' money into rivals' vehicles. "Inhibitions have weakened because there is so much emphasis on performance and making the manager responsible for it. One of the ways is to look at all the range of options," says Malcolm Naish, UK chairman of LaSalle Investment Management.

This pick-and-mix approach is leading to mandates where the manager's job is to invest clients' money across a range of indirect vehicles, blending them to suit the investor's risk/reward profile.

"Within the indirect market a particular growth area is i n 'fund of fund' mandates," notes Guy Morrell, director of UK property at Henderson Global Investors.

And increasingly, even funds that are large enough to justify holding substantial portfolios of their own are turning to indirect vehicles as a way of accessing specialist assets or management styles.

"We tell clients they should be looking at 30-40 per cent indirect to complement what they can't have in direct holdings," says Peter Macpherson, business development director of Baring Houston &Saunders.

For example, Hermes, which manages the telecommunications industry pension fund, has some very chunky and high-profile indirect real estate holdings.

"We can put up to about 10 per cent in indirect real estate that's on equity invested," says Alastair Ross Goobey, chief executive of Hermes Property Asset Management.

Hermes participated in the buyouts of three quoted property companies: Argent, MEPC and Greycoat and it has also invested in limited partnerships, including Greycoat's Tower 42 development in the City of London.

Hermes now also manages a £500 million unauthorised property unit trust (PUT). These vehicles have been around since the mid-1960s and have been the main route for UK pension funds to access real estate indirectly; they are not available to tax-paying investors.

The PUT sector has expanded considerably over the past couple of years, to £6.2 billion.

PUTs offer tax-transparency and a measure of liquidity, as the managers undertake to redeem units monthly. There is also a secondary market for units, which last year saw around £450 million change hands. Dealing costs are low compared to stamp duty on sa les of direct property holdings.

Fund managers today have a choice of some 27 unauthorised property unit trusts, ranging from the £1.2 billion Schroders Exempt Property Unit Trust to smaller specialist ones like the £19 million Baring Houston &Saunders Residential Property Unit Trust.

However, on-shore UK PUTs have the disadvantage that they are restricted to purely tax-exempt investors.

Thus, new Jersey-based property unit trusts have gained in popularity over the past couple of years. These allow investors with different tax profiles, including foreign ones, to be mingled.

But it is limited partnerships that are the indirect vehicle du jour for pooled investment in property. Since 1997, the use of these mostly closed-ended, limited term clubs has exploded. There are now around £11 billion worth in the UK.

DTZ estimates that UK pension funds have performance-enhancing debt directly on to their balance sheets. "With debt cheap, it easy to add five basis points to performance. That's very welcome," says Mr Hunter.

But not all fund managers are enthusiastic about the indirect route, especially limited partnerships. The problem is their illiquidity.

There is no established format or market for partnership interests or units and to date very few have changed hands. N or is there yet any performance benchmarking.

"We feel it is important to allow the market to reach a mature phase before we advise our client funds to invest in that area," says Alan Bate, a director of Royal &Sun Alliance Property Investments.

"There's a performance measurement issue, there's the variety of formats." In addition, partnerships are cumbersome to set up and restricted to 20 partners, though this can be circumvented by setting up feeder funds. Expanding partnerships by raising additional capital from either existing or new investors is also complicated.

Similarly, the UK's biggest institutional investor, Prudential, has only invested in one, Charterhouse's residential partnership, to get access to that specialist sub-sector. "For me the jury is still out," says Martin Moore, managing director of Prudential Property Investment Management.

"There are questions about the way limited partnerships are valued and priced, and how tradable they are. There is no proven depth to the market." Privately, other fund mangers voice doubts about the real management costs of limited partnerships.

"Holding property indirectly through limited partnerships may make the head office team look lean, but what are the actual costs of running the assets - how efficient is the structure - compared to directly owned assets?" asks one. And humdrum performance may be masked by gearing.

"Limited partnerships have a role to play, but some are not very well structured or managed. They have to be looked at carefully - otherwise you may get locked into a structure that is relatively illiquid and inappropriate," warns Mr Morrell.

The third way of indirect investing, property derivatives, have yet not taken off. Property Income Certificates and Property Index Forwards, originally issued by Barclays, offer returns on these linked to the performance of the UK property sector as measured by Investment Property Databank's benchmark index.

Alex Catalano is contributing editor of Estates Gazette in the UK.