In addition to commingled funds, real estate investors can opt to have an investment manager segregate property and administer it solely on the investor’s behalf; these are known as separate accounts. Forty percent of institutional investors committing to private real estate worldwide have committed to separate accounts, or will consider them. These investors are fairly evenly dispersed by region, with over 43% of North America and 31% of Europe-based LPs having committed to or willing to consider separate accounts. Among those that invest in or consider separate accounts worldwide, 82% have expressed a preference for North America-based real estate, 66% for Europe-based real estate, and 48% for globally diversified real estate.
Although separate account structures are fairly evenly dispersed by region, they vary widely by investor type. Over 46% of public pension funds investing in private real estate already commit to separate accounts or will consider them. Asset managers and private pensions also consider these structures, with 66% and 38% respectively committed to or considering separate accounts. Other, typically smaller, investor types are far less prone to invest in separate accounts, including endowments (25%), and foundations (20%).
Generally speaking, smaller investors are unlikely to have the resources required to make a real estate separate account worthwhile. Sixty-six percent of private real estate LPs with more than $10bn in AUM actively invest in, or will consider, real estate separate accounts. However, only 23% of investors in private real estate funds with less than $1bn in AUM invest in or consider separate accounts. Fund managers require large capital commitments to establish a separate account structure. For instance, Los Angeles County Employees’ Retirement Association (LACERA) recently announced plans to commit $300mn to each of its four separate account managers by the end of Q2 2015. Large investors such as LACERA have also dedicated staff to select and monitor their real estate separate account investments, as these investments often require more investor discretion than commingled funds.
In conclusion, separate accounts remain an attractive alternative to commingled funds for those investors that have the resources to manage them. North America-based LPs are more prone to engage in these structures, and among separate account investors, the majority prefer exposure to North America-based real estate. In terms of investor type, public and private pensions along with asset managers are more likely to consider these investments than other investor types, a trend which is likely to continue looking ahead.