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Diversification Drives Institutional Appetite for RE

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In recent years, institutions (pension funds, endowments, family offices, etc.) have made substantial investments into real estate. In a Cornell University study published last year, 198 institutions surveyed owned more than $400 billion in real estate. However, surprisingly, these assets only make up small portions of many of their portfolios.

That could change soon, according to a recent Greenwich Associates report in partnership with Cohen & Steers. The firms surveyed defined benefit (DB) funds, including 33 corporate plans, 28 public plans, 16 defined-contribution plans and 15 endowments and foundations. There were 18 investment consultants queried as well.

The report found that institutions are increasingly turning to real estate and other real assets to diversify their portfolios, as well as add stability and strong returns, as opposed to liquid assets, such as stocks and bonds. For this reason, more than 80 percent of investment consultants are advising their clients to invest in private real estate.

Over the next year, firms tallied in the survey expect to increase the allocations in private real estate by at least nine percent. Meanwhile, several firms said they would start investing in real estate for the first time in 2015.

The report stresses that institutions do have some concerns regarding real estate investments, namely, “factors like the risk-return trade-off, timing of the market cycle and investment liquidity in an asset class in which objective and reliable market data can be hard to find” as well as the growing competition in real estate acquisitions. As a result, there is a high value placed on partnerships with outside real estate consultants and advisors.

At the beginning of the year, investment management firm Blackrock reported that 49 percent of their institutional investors expected to increase their commercial real estate holdingsin 2014. The survey found the main reason for this jump was investor desire for “income, stability and duration.”

Case in point: the real estate arm of Canada-based pension-fund manager Caisse de Dépôt et Placement du Québec is paying just under $2.3 billion for Manhattan’s 2 Bryant Park, the largest office transaction in New York City since 2009.

Image Source: Mark Ittleman, Flickr


By: Dan Miller

Co-Founder | Fundrise

Follow Dan on Twitter: @dan_miller

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