This study examines the liability hedging characteristics of both direct and indirect real estate, in the advent of fair value accounting obligations for pension funds. We explicitly model pension obligations as being subject to interest and inflation risk toanalyze the ability of real estate investments in hedging the market value of pension liabilities and to quantify its role in an ALM portfolio. We find that the portfolio composition differs depending on the definition of liability return. When liability returns solely follow actuarial changes, the mean variance efficient portfolio allocations towards indirect real estate and fixed income increases compared to the asset only optimization. Once accounting for interest and inflation risk the results indicate that the hedging benefits of direct and indirect real estate are not pervasive enough to materialize in an ALM optimization. The portfolio allocation of direct real estate decreases in favor of fixed income securities. When taking pension liabilities as the starting point and coordinating the management of assets and liabilities in order tomaintain a surplus of assets beyond liabilities the role for real estate is slightly more limited.