At its core, IREI is an information company focused on providing institutional investors with reliable and useful decision-making tools.
- 1) What is institutional real estate?
- 2) What are the risk and return expectations of pension funds investing in equity real estate?
- 3) Who are institutional investors?
- 4) How big is the institutional real estate market?
- 5) How much of a pension fund's portfolio is typically allocated to real estate?
- 6) Is real estate primarily an equity vehicle or an income vehicle?
- 7) Who are the largest pension fund real estate advisers?
- 8) What are the general trends in real estate portfolio management?
- 9) What is the difference between portfolio management, asset management and property management?
- 10) Are pension funds interested in international investing?
- 11) How do I access my subscription to IREN?
1. What is institutional real estate?
Institutional real estate can be classified as high-quality commercial properties — such as office buildings, retail centers, industrial facilities, apartment complexes and hotels — that are usually congregated in large investment portfolios managed professionally on behalf of third-party owners or beneficiaries. Return to top
2. What are the risk and return expectations of pension funds investing in equity real estate?
Most investors in “core” properties (i.e., high-quality, stable, income-producing office, industrial, multifamily and retail properties) expect to receive around 8 percent to 9 percent on their unleveraged real estate investments. If they use leverage, they tend to leverage assets between 5 percent and 60 percent, with average portfolio leverage ranging between 20 percent and 40 percent. Leveraged return expectations for core real estate investments, therefore, range between 10 percent and 15 percent. Investors typically expect value-added investment returns of between 12 percent and 15 percent and opportunistic returns in excess of 18 percent to 20 percent.
Many of the larger investors have both core and high-yield investment components within their portfolios and, therefore, have different risk/return expectations depending upon the strategy for each portion of the portfolio. Some investors focus only on core strategies, others only on high-yield. Return to top
3. Who are institutional investors?
Institutional investors include public and corporate pension funds, endowments and foundations, life insurance companies, commercial banks, real estate investment trusts, and sovereign wealth funds, among other financial entities. Return to top
4. How big is the institutional real estate market?
The commercial real estate marketplace in the United States currently is estimated at $4.0 trillion. The equity market capitalization of public real estate investment trusts (REITs) was approximately $408 billion at year-end 2011. Return to top
5. How much of a pension fund's portfolio is typically allocated to real estate?
Pension portfolios for the most part consist primarily of stocks, bonds and money market instruments. Real estate and other assets, such as private equity or venture capital, play a relatively small role, primarily as a diversification tool. Allocations to real estate typically range between 5 percent and 10 percent. However, keep in mind that only a small percentage of U.S. plan sponsors invest in real estate because most plans are too small; of the approximately 70,000 plan sponsors in the United States, only an estimated 2,000 to 2,500 include real estate in their portfolio mix. Return to top
6. Is real estate primarily an equity vehicle or an income vehicle?
Traditionally, pension funds have viewed real estate as a relatively high income-producing asset class with equity characteristics, and underwriting has focused primarily on assessing the quality or sustainability of cash flow. During the past several years, many investors have been changing their perspectives, viewing real estate now as more of an equity asset class with better-than-average income characteristics.
As more and more pension funds begin to pay out more cash to beneficiaries (i.e., pensioners) than they are receiving in annual contributions, they can be expected to become much more income-oriented so that they will be in a better position to fund those negative cash flows without having to liquidate assets. Because of its inherent potential for generating relatively high cash distributions, we would expect pension funds to continue to view real estate as an income-producing asset with equity characteristics. Return to top
7. Who are the largest pension fund real estate advisers?
Some of the largest investment advisers in the United States include Brookfield Asset Management, CBRE Global Investors, The Blackstone Group, RREEF Real Estate, TIAA-CREF Asset Management, J.P. Morgan Asset Management and Principal Real Estate Investors. Institutional Real Estate, Inc., in partnership with U.K.-based Property Funds Research, conducts an annual survey and ranking of Global Investment Managers. The report and rankings can be downloaded at http://publications.irei.com/tirelrpt.html. Return to top
8. What are the general trends in real estate portfolio management?
The most important trend in real estate portfolio management is an awareness that it exists as a profession, and that its practice is important. Most of the 1980s and 1990s were dedicated to the assembly of portfolios. While assembling portfolios is still a concern, especially with the global competition for good properties at attractive prices, the need to manage portfolios prudently also has become important. The primary role of a portfolio manager is to help define portfolio objectives, and then to construct and manage the portfolio so as to achieve those objectives at the lowest tolerable level of risk. Return to top
9. What is the difference between portfolio management, asset management and property management?
A portfolio manager is responsible for a portfolio of assets and typically operates for the benefit of a third party. Portfolio managers tend to operate at the strategic level, focusing on the development or clarification of portfolio risk and return objectives, on the construction and strategic management of portfolios, and on the monitoring of both market conditions and portfolio performance within the context of overall portfolio objectives.
Asset managers and property managers tend to focus more on tactics, i.e., on the implementation of portfolio strategy. Asset managers typically report to portfolio managers and work through third-party property managers, who report to the asset managers. Asset managers, therefore, are focused on managing collections of assets (as opposed to portfolios) and often are regionally focused. Their primary objective is to coordinate the activities of local property management personnel toward the achievement of the portfolio strategies established by the portfolio managers to whom they report.
Property managers typically are responsible for managing the day-to-day operations at the property level, either full-time on-site at one property or for a collection of properties within a specified submarket, market or region. Duties usually include leasing and property operations (maintenance, engineering, tenant relationships, on-site construction management, property-level accounting or data entry, and such). Property managers either report to portfolio managers (in vertically integrated companies) or to asset managers (in companies that are not vertically integrated). Return to top
10. Are pension funds interested in international investing?
Yes, definitely! While 10 years ago only a few tax-exempt investors had real estate investments overseas, today it is far more common. Interest in cross-border investing is increasing as institutional investors seek greater portfolio diversification and look to capitalize on the best risk-return opportunities. In the most recent annual U.S. plan sponsor survey conducted by Institutional Real Estate, Inc. and Kingsley Associates, Tax-Exempt Real Estate Investment 2012, investors indicated a notable increase in capital earmarked for foreign investments. While investors allocated 6.8 percent of new capital commitments for foreign investments in 2011, that figure was expected to increase to 10.4 percent in 2012. As investors become more comfortable with international investing and better understand the inherent risks, and as emerging markets such as Brazil and China exhibit greater transparency, cross-border capital flows should increase. Return to top
11. How do I access my subscription to IREN?
There are a few ways to enjoy your IREN subscription.
(2) Your email: You will be sent regular IREN emails daily. Click on the links that will lead to the stories on our site. You will also receive IREN on Friday, which will be a recap of the news of the week as well as anything new that has come up that day.
(3) Print it: Go to Institutional Real Estate Newsline under “PUBLICATION” on our main menu. You will be taken to the main information page for IREN. If you scroll down, you will see "RECENT ISSUES." Click on “MORE DETAIL” to go to the individual stories. Click on “Print Entire Issue” at the top of the article section to have an issue compiled for you in one print job. Or, click into an article and print individually.