US Public Pension Funds Investing in Real Estate

by Farhaz Miah

  • 02 May 2012
  • RE

US-based public pension funds constitute one of the most prominent institutional investor segments investing in real estate. The aggregate assets under management held by US public pensions that are active in real estate is over USD 3 trillion, with the average real estate allocation amounting to 6.3% of total assets, below  the 8% average target allocation of this group of investors.

Fifty-seven percent of public pension funds based in the US that invest in real estate have assets under management of below USD 1 billion; a further 28% have assets of between USD 1 billion and USD 9.99 billion. Eleven percent have total assets of USD 10-49.99 billion. Five percent have total assets of USD 50 billion or more.

Seventy-three percent of US public pension funds that invest in real estate have a real estate allocation of less than USD 250 million. Around 7% of US public pension funds allocate between USD 250 million and USD 499 million to the asset class, while 9% have investments that range between USD 500 million and USD 999 million in total value. Eight percent have between USD 1 billion and USD 4.99 billion invested in the asset class, while 4% have investments that total or exceed USD 5 billion.

In terms of the private real estate fund strategies preferred by these investors, 81% of US public pension funds target core vehicles, with 64% having a preference for value added funds. Opportunistic vehicles are also on the radar of US public pension funds, with 48% of such investors demonstrating a preference for funds utilizing this strategy. Thirty-eight percent of US public pension funds consider core-plus funds, with 35% and 30% interested in debt and distressed vehicles respectively. Fifteen percent of US public pension funds consider funds of funds, with only 8% considering secondaries.

Around 93% of US public pension funds gain exposure to the asset class through allocations to private real estate, and for many of these investors, this route is the only way real estate investments are accessed. Investments through private real estate include commitments to closed-end private equity real estate vehicles and allocations to open-ended core funds. Only 24% invest directly, which usually is a method employed by the larger public pension funds with the in-house capacity to execute and manage such investments. A sizeable 40% of US public pension funds invest in listed real estate, demonstrating an appetite for liquid real estate assets such as real estate investment trusts (REITs), enabling investors to accrue the benefits of inflation hedging while satisfying liquidity constraints.

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