What pension fund trustees should know about investing in real estate

Is your plan effectively managing its real estate portfolio?

As a pension fund trustee, you have a lot on your plate. Nareit has designed this site to provide you with information to help you think critically about your plan’s real estate allocation.

What percentage of your pension fund is invested in real estate?

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There's great opportunity for you!

While your plan is below the overall average real estate allocation for pension funds, this means you have an opportunity to take advantage of all of the benefits that real estate investing provides.

You're off to a great start

Congratulations, your plan is benefiting from diversification into the real estate asset class. But is your plan maximizing this allocation?

0% is less than the real estate share of the investable market basket in the U.S (14%), and lower than what many models would suggest as being optimal.

Congratulations!

Your plan clearly recognizes the value of real estate investment. But is your plan maximizing this allocation?

Most pension funds are not properly diversified with real estate

When it comes to real estate, most pension funds investments are less than market weight (14%), and lower than what many models would suggest as being optimal.

Compared to THE U.S. INVESTMENT MARKET1

0%real estate
You
14%real estate
The Market

REAL ESTATE VS. OTHER INVESTMENTS2

Nareit analysis of Preqin Real Estate Online data as of December 2020

Diversification of portfolio assets is important to long-term success

Real estate plays an important role in your portfolio, adding diversification, performance that reflects a relatively strong and stable income component, the opportunity for capital appreciation, as well inflation protection.

  1. Diversification
  2. Performance
  1. Capital appreciation
  2. Inflation protection
93%
93% of public pension funds invest in real estate3
Real estate should be considered fundamental and included in a well-diversified portfolio.
Pension funds have, for decades, been investing in the real estate asset class, recognizing the important role it plays within investment portfolios to help build portfolio value, deliver income, and manage risk.
Real estate literally houses the economy.

What is an optimal allocation to real estate?

Diversification is among the most powerful risk management tools available to investors and it is primarily achieved by investing the plan’s assets in different types of investments or “asset classes”. While sometimes real estate is referred to as an “alternative” asset class, in reality it is a substantial component of the investment opportunity set in the United States, in fact it is the third largest asset class.

REAL ESTATE IS THE THIRD LARGEST ASSET CLASS4

Different researchers, methodologies and time periods 5

13%real estate
Morningstar Analysis
Black-Litterman Mean Variance Optimization
1990-2021
18%real estate
Wilshire Analysis
Surplus Optimization
1990-2019
18%real estate
Wilshire Analysis
Surplus Optimization
1990-2012
20%real estate
Morningstar Analysis
Mean Variance Optimization
1990-2010
20%real estate
Morningstar Analysis
Fat Tail Optimization
1990-2009
20%real estate
Morningstar Analysis
Liability Relative Investing
1990-2009

Experts say you should have 13-20% of your portfolio invested in real estate.

More detailed models that include a broad mix of asset classes and use a variety of different asset allocation methodologies also demonstrate that a meaningful allocation to real estate, somewhere in the 13%-20% range, is appropriate.

Rethinking the real estate asset class

Most pension funds that invest in real estate, on an asset weighted basis, invest in real estate using a blend of REITs and private real estate investment.

Real estate is a mature asset class, and like equity and fixed income investments, exposure to real estate can be gained through public market investment as well as through private market investment.

For investors that are considering adding a real estate allocation or are beginning to build their real estate portfolio, REITs generally provide the most cost effective and efficient way to gain exposure to the asset class.

Private Market Investments

“Private market” investments can be thought of generally as investment in real estate through private transactions and vehicles which are not listed on the stock exchange.

Public Market Investments

“Public market” investment generally means investment in real estate by investment in REIT (Real Estate Investment Trust) securities listed on the stock exchanges.

Data Center
Diversified
Health Care
Industrial
Infrastructure
Lodging/Resorts
Office
Residential
Retail
Self-Storage
Specialty
Timberland

Listen to find out how the City of Austin Employees Retirement System implemented a portfolio completion strategy using REITs:

What is a REIT?

A REIT, or Real Estate Investment Trust, is a company that owns, operates or finances income-producing real estate. REITs provide Americans the chance to own valuable real estate, present the opportunity to access dividend-based income and total returns, and help communities grow, thrive, and revitalize. REITs of all types collectively own more than $3 trillion in gross assets across the U.S. Public REITs own approximately $2 trillion in assets and stock exchange listed REITs have an equity market capitalization of more than $1 trillion.

Investing in both REITs and private real estate investments can be a powerful risk management tool –

historically moderating the likelihood of negative investment returns and providing the opportunity to capture more of the upside in the form of higher returns. Use the slider to see how this could work in your portfolio.

BLEND OF REITS AND PRIVATE REAL ESTATE6

Use the slider to compare various blends

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Use the slider to see how blending REITs and private real estate can reduce down-side risk
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FTSE Nareit Index
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What are the challenges with investing in real estate?

  1. It is difficult to fully invest in the entire real estate asset class globally.
  2. As a relatively illiquid asset, it can be challenging to control the real estate investments within a portfolio.
  3. Investors want to maximize performance while managing investment costs.
  4. Achieving diversification within the real estate allocation—as part of a risk management strategy—can be difficult.

Read on to find out how REITs can help address portfolio management challenges that face today's real estate investor.

1. It is difficult to fully invest in the entire real estate asset class globally.

REITs enable investors to optimize property and geographic exposures within their real estate allocation, delivering access to traditional “core” property sectors and beyond including hotel, self-storage, healthcare and life sciences sectors; as well as the new economy property sectors like infrastructure, data centers, and networked logistics and industrial properties that support the secular trends toward e-commerce and the digital economy. Today's REIT industry reflects the modern landscape of the real estate asset class.

EVOLUTION OF REIT INDUSTRY: 1993 VS. 20207

Properties you may recognize

Salesforce Tower, San Francisco, CA. Boston Properties (NYSE: BXP)
TheMART, Chicago, IL. Vornado Realty Trust (NYSE: VNO)
Empire State Building, New York, NY. Empire State Realty Trust (NYSE: ESRT)
The Yards, Washington, D.C. Brookfield Properties (NASDAQ: BPYPP)
Westfield World Trade Center, New York, NY. Unibail-Rodamco-Westfield (OTCMKTS: UNBLF)
Baylor Charles A. Sammons Cancer Center, Dallas, TX. Physicians Realty Trust (NYSE: DOC)
One PPG Place, Pittsburgh, PA. Highwoods Properties (NYSE: HIW)
Third Street Promenade, Santa Monica, CA. Federal Realty Investment Trusts (NYSE: FRT)
The Don CeSar, St. Pete Beach, FL. Host Hotels & Resorts (NYSE: HST)

2. As a relatively illiquid asset, it can be challenging to control the real estate investments within a portfolio.

Because REITs are real estate companies traded on stock exchanges, they provide real estate investors with effective governance in addition to market liquidity. Market liquidity makes it easier to:

Manage your real estate allocation, as you would other assets within the portfolio.
Efficiently invest and/or rebalance to the plan’s investment policy weights.
Act on convictions you may have on a property type or geography.
Increase / decrease asset class allocation in a timely fashion
Achieve diversification

3. Investors want to maximize performance while managing investment costs.

For long-term investors like pension funds, investing in real estate through REITs has provided not only asset class diversification, but also competitive investment performance while preserving purchasing power by outpacing inflation.

REITs' track record of delivering reliable and growing dividends, combined with long-term capital appreciation through stock price increases, has historically provided investors with total returns that are competitive with those of other stocks and higher than most fixed-income investments.

It is important that you and the pension fund staff can understand the implicit and explicit costs of managing the system’s investments. REITs are often the most cost-efficient way for pension funds to invest in the asset class.

Annual net total return and expense by asset class for U.S. Defined Benefit Pension Funds 1998 - 20188

REITs: the strongest performing real estate asset in pension portfolios9

4. Achieving diversification within the real estate allocation—as part of a risk management strategy—can be difficult.

Including real estate as an asset class is a significant step towards building a diversified pension investment portfolio, and an important arrow in the risk management quiver. Real estate is a mature asset class providing investors with an array of opportunities to gain real estate exposure and earn real estate driven investment returns. These opportunities present investors with ways to diversify within the real estate allocation, and therefore, additional tools to manage risk within the real estate portfolio.

REITs are often the most efficient and cost-effective way to access the real estate asset class and offer an important opportunity for investors not only to build their exposure, but also to diversify within their real estate investment program. Whether your plan is new to real estate, or an experienced real estate investor, there are specific benefits of adding a meaningful allocation to REITs.

REAL ESTATE HAS BEEN LESS CORRELATED WITH THE EQUITY MARKET THAN OTHER ALTERNATIVES10

REIT-OWNED PROPERTIES

Property Type Number of Properties
Retail & Restaurant 28,454
Telecommunications 98,080
Multifamily Housing 4,000
Office 2,477
Health Care 8,189
Industrial 7,292
Property Type Number of Properties
Data Centers 350
Self-Storage 6,293
Hotels/Lodging 1,931
Timberland 15 M acres
Single Family Rental 134,000
Outdoor Advertising 209,033
VISIT REITS ACROSS AMERICA

The next steps

Nareit hopes this data has been useful as you assess your plan’s real estate allocations.

Nareit speaks with hundreds of pension funds every year and provides training and education at no cost for Boards and staff on how real estate and REITs can help your plan.

If you have any questions, please contact Kurt Walten, Senior Vice President, Investment Affairs.

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Nareit® is the worldwide representative voice for REITs and publicly traded real estate companies with an interest in U.S. real estate and capital markets. Nareit's members are REITs and other businesses throughout the world that own, operate, and finance income-producing real estate, as well as those firms and individuals who advise, study, and service those businesses. National Association of Real Estate Investment Trusts® and Nareit® are registered trademarks of the National Association of Real Estate Investment Trusts (Nareit).

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