Pensions Are Making Riskier Real Estate Bets

Pension funds are making riskier bets on real estate as investor demand for alternative assets rises, according to Joseph Azelby, the head of real estate and private markets at UBS Group’s asset management unit. 

They’ve been shifting a portion of their core real estate holdings to properties under development or renovation, Azelby said Thursday during a UBS Asset Management lunch with media in New York. Azelby, who joined UBS from Apollo Global Management this year, said on the sidelines of the gathering that pensions may pick up an additional 200 basis points to 300 basis points of yield by doing so.

Azelby sees these riskier bets as an area of potential concern because pensions had similarly stretched for yield in the runup to the 2008 financial crisis. Rising investment in properties being developed during the later stages of the economic cycle is worth monitoring because a downturn could leave pensions holding vacant buildings, he explained.

At this point there’s no cause for alarm in “value-added” strategies in real estate, according to Azelby. He said that allocations to alternative investments, including private equity, have been paying off in the expansion since the crisis. He did, though, question whether private market bets will prove as rewarding over the next decade, particularly as investor appetite for such assets continues to grow.

Clients of UBS, including institutional investors and high-net-worth individuals, are increasingly demanding alternatives partly because they’re viewed as uncorrelated to traditional bets in stocks and bonds, according to remarks made by Suni Harford, head of investments for UBS Asset Management, during the lunch. The Swiss bank unit had $824 billion in invested assets under management at the end of March. 

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Nuveen, which manages $988 billion of assets, expects markets will remain volatile as long as the trade war persists between the U.S. and China. Yet the firm still sees a solid backdrop for equities.

“We think global growth will slow in 2019, but we don’t believe the world’s major economies will enter recession,” Nuveen’s global investment committee said in their midyear outlook. “Our investment teams are focused on finding opportunities to buy and own high-quality assets — without becoming too defensive in their approach.”