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How do Pension Funds Access Real Estate? - September 2016

by Charles Wood

  • 23 Sep 2016
  • RE

Both private sector and public pension funds look to gain access to real estate in a variety of ways. Investment in unlisted real estate funds remains the most widely used route to market for both types of pension funds (77% and 84% respectively). Private real estate funds suit the many characteristics of these long-term investors, providing low correlation with bonds and stocks, while reducing the sensitivity of investor capital to the potential short-term market volatility of listed real estate investment trusts.

Both direct and listed real estate investments are utilized by approximately a third of pension funds. The higher cost and experience required to invest, as well as the illiquid nature of direct investments, could be reasons behind the lower participation rate. Listed funds can experience short-term volatile price movements in turbulent markets, possibly dissuading pension fund investment. Similar proportions (31% and 24% respectively) of public and private sector pension funds also target co-investments; both investor types are also currently open to investing alongside a fund manager.

The rate of participation in direct real estate by pension funds has a strong correlation to investor AUM, as would be expected. Just 13% of public pension funds with less than $1bn in AUM partake in direct investments, compared with nearly two-thirds of investors with over $50bn in AUM, with this figure rising to 82% for private sector pension funds. The $820mn City of Fort Lauderdale Police & Fire Retirement System has its entire real estate portfolio invested in private real estate funds – an indicator of the restricted scope available to smaller pension funds and the high barriers in place for direct investment. On the other hand, larger pension funds have the capability to access real estate through all routes to market, including direct holdings: one such investor is Stockholm-based AMF Pensionsförsäkring. The private sector pension fund invests its $7.7bn allocation to real estate solely via direct acquisitions.

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