Investor Overview: North America-Based Pension Funds in Private Real Estate – July 2016

by Joseph Borda

  • 08 Jul 2016
  • RE

Real estate remains an important part of many institutional investor portfolios, due in part to its relatively low correlation to traditional asset classes, the potential to generate high returns and the diversity of property types, strategies and markets available for investment.

Preqin’s Real Estate Online currently tracks 835 North America-based public and private sector pension funds that invest in private real estate funds; these investors account for just under a quarter (24%) of all institutional investors active in the private real estate market, highlighting their importance to the asset class. Combined, these pension funds have aggregate assets under management of approximately $7.4tn, and allocate over $500bn to private real estate funds.

As shown in the chart above, core vehicles are the most preferred private real estate strategy of North America-based pension funds; however, a larger proportion of public pension funds target this lower risk strategy. A greater proportion of public pension funds also seek value added strategies than their private sector counterparts, while the opposite is true for opportunistic strategies. In terms of the wider North America-based institutional investor landscape, pension funds are much more risk adverse, with significantly greater proportions of other institutional investors displaying a preference for the higher risk value added and opportunistic strategies.

On average, private sector pension funds have a lower current allocation to private real estate than public sector pension funds, 6.1% compared to 7.3% of total assets respectively; however, both look to allocate a greater proportion of assets to private real estate funds than the wider North America-based institutional investor universe (5.4%). The public pension fund California Public Employees' Retirement System (CalPERS) is the largest pension fund in the world by current allocation to private real estate, committing $26bn to this vehicle type. IBM Retirement Fund (USA) commits $2.8bn to private real estate, which is the largest amount of any North America-based private sector pension fund.

Over the coming year, a number of public and private pension funds are looking to invest in private real estate. For example, United States Steel and Carnegie Pension Fund is targeting opportunistic funds over the next 12 months, with the private sector pension fund continuing to invest on a global basis; public sector pension fund Employees' Retirement System of the State of Hawaii is looking to commit $300mn across three or four private real estate funds over the same time period.

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