US Private Sector Pension Funds Investing in Private Real Estate

by Farhaz Miah

  • 27 Jun 2012
  • RE

US-based private sector pension funds are one of the most important institutional investor types active in the real estate space. The aggregate total assets under management (AUM) of US private sector pension funds that are active in real estate is approximately $1.8tn, with the average real estate allocation amounting to 4.7%, below an average target allocation of 6.6%. The substantial levels of assets under management held by private sector pension funds, and the fact that on average such institutions are under allocated to private real estate, suggests that they will continue to be an important source of capital for real estate fund managers.

Twenty percent of private sector pension funds investing in real estate have AUM of less than $1bn, with 61% managing total assets between $1bn and $9.9bn. Sixteen percent have total assets between $10-49.9bn, while 3% have total assets exceeding $50bn.

Almost two-thirds of US-based private sector pension funds have overall real estate allocations of less than $250mn. Seventeen percent allocate between $250mn and $499mn to the real estate asset class, while a further 7% have investments ranging between $500mn and $999mn. A significant 10% have between $1bn and $4.9bn allocated to real estate, while 1% of private sector pension funds have investments of $5bn and above.

US-based private sector pension funds have a strong preference for value added vehicles, with 63% favouring this strategy. Fifty-five percent of US private pension funds exhibit a preference for opportunistic funds, with core funds in the sights of 53%. Debt funds are on the radar of 21% of private pension funds, while 16% target distressed vehicles. Fourteen percent demonstrate a preference for core-plus funds. Only 5% and 3% of private sector pension funds from the US consider real estate funds of funds and secondaries respectively.

Ninety-four percent of US-based private sector pension funds access real estate through allocations to private real estate funds, and for many investors this route is the only way exposure to the asset class is gained. Private real estate investments include both commitments to closed-end private equity real estate vehicles and allocations to open-ended core funds. Only 19% invest directly in opportunities, a route of access that is usually only employed by the larger private pension funds, with the requisite in-house capacity to source, execute, and manage such investments. A notable 33% of US private pensions invest in listed real estate, demonstrating appetite for liquid real estate assets such as real estate investment trusts (REITs), enabling investors to benefit from inflation hedging while satisfying liquidity constraints.

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