As the market recovers from the Covid-19 pandemic, some institutional investors are devoting increasing resources to their real estate portfolios.
A number of pension funds have increased their target real estate allocation in the past year, indicating renewed interest in the asset class after the pandemic. For example, the Iowa Public Employees’ Retirement System, which handles a trust fund of around $35 billion, announced in September 2020 that it planned to increase its current private real assets allocation from 7.5 percent to 8.5 percent of its portfolio, according to a press release.
“Due to the significant decline in investment grade bond interest rates, in September of 2020 the IPERS Investment Board reduced the target allocation of core-plus fixed income from 28 percent to 20 percent, and increased the target allocations of all private investment categories,” IPERS CEO Greg Samorajski said in an email.
The Employees Retirement System of Texas is also eying higher real estate allocations: In January, the $29.1 billion pension fund’s consultant Meketa Investment Group proposed increasing its target for new commitments to real estate assets from $300 million to $500 million. In a memo on the proposed change, Meketa noted the “remarkable rebound in public markets” in the recovery from the pandemic.
“Covid-19 has accelerated secular changes already impacting parts of the real estate market pre-pandemic, resulting in an impressive dispersion of returns by property type over the course of calendar year 2020,” the consultant said. “Industrial, residential, data center, and life science real estate proved resilient during Covid-19 conditions, while retail and hospitality notably suffered.”
Large pension funds in California and Kansas have increased their target real estate allocation in the past year, according to a report from the Wall Street Journal.
Real Estate Managers “Haven’t Had This Much Interest” Since Post-2008
The shift isn’t necessarily surprising, according to James Corl, head of private real estate at Cohen & Steers. He said asset allocators and fund managers have an opportunity to take advantage of the state of the real estate market.
Corl credits the increased interest in real estate allocations to a few factors: the shift away from fixed income, the increased sophistication of professionals who invest in the asset class, the cyclical economic behavior of real estate, and inflation. Real estate, he said, can act as a hedge against inflation.
“All these reasons are kind of working together: More experience in real estate, people shifting out of fixed income and into real estate, and people understanding that, if we're moving into inflationary environment, real assets are going to perform better than financial assets,” Corl said.
According to Corl, target allocations to real estate have been increasing over time — and he expects that rise to continue.
“Fifteen to 20 years ago, those numbers were more like five to eight,” Corl said. “And now, I think people are moving up and most folks are getting closer to 10. Some are going to 12, and some are even moving to 15.”
Scott Crowe, managing director of real estate firm CenterSquare Investment Management, also credits the affordability and liquidity of real estate investment trusts for the real estate hype. As for the historical precedent, Crowe said: “We haven’t had this much interest since after the great financial crisis.”