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Pension Funds Investing in Real Estate

The $16.3tn in assets under management held by pension funds around the world continues to be a key source of capital for the real estate industry. Charles Wood provides an in-depth review of this investor universe, including their strategic preferences, largest allocations to real estate and which pension funds are looking to add to their current portfolio.

Preqin’s Real Estate Online currently Fig. 1: Institutional Investors in Real Estate by Type tracks 1,005 private sector pension funds and 772 public pension funds that invest in real estate, accounting for 19% and 15% respectively of all institutional Private Sector Pension Fund investors active in the asset class, more 12% 19% than any other investor type (Fig. 1). Public Pension Fund 6% Despite greater participation from those Foundation in the private sector, public pension funds currently allocate more than double the 8% Endowment Plan amount of capital to the asset class: Wealth Manager $681bn compared with the $340bn 15% allocated by private sector pension funds – 28% and 14% of all capital allocated to 8% Family Office real estate respectively (Fig. 2). Insurance Company 9% Real estate remains a principal component 14% Asset Manager of most pension fund portfolios, with 87% 10% of all public and 73% of all private sector Other pension funds currently investing in the asset class (Fig. 3). The 87% of public pension funds that invest in real estate Source: Preqin Real Estate Online is the highest participation rate of any institutional investor type: three-quarters (76%) of endowment plans are active in New Jersey State Investment Council: 4% target allocation to international real real estate, with insurance companies after recently announcing a reduction in estate and is currently in the market for its (68%), sovereign wealth funds (60%) and its allocation to hedge funds, the public maiden investment. family offi ces (48%) among other investor pension fund has subsequently increased groups with signifi cant participation in its target allocation to real estate from Location the asset class. These high participation 5.3% of its total assets to 6.3% for the 2017 rates are partly due to the alignment of the fi scal year – equating to approximately Pension funds are geographically diverse, asset class with the long-term investment $700mn of fresh capital. Furthermore, although higher concentrations of funds horizons of investors, as well as satisfying pension funds which have previously not exist in regions of greater economic many of these investors’ mandates for invested in the asset class are now also development (Fig. 4). The majority of a diversifi ed portfolio of investments. A looking to add real estate to their portfolio: private sector pension funds targeting real number of pension funds are increasing Pensionskasse des Bundes PUBLICA is estate are split almost equally between their real estate weightings, including one example, having recently created a those based in North America (47%) and

Fig. 2: Capital-Weighted Breakdown of Institutional Fig. 3: Pension Funds Investing in Real Estate by Investors Investing in Real Estate by Type Investment Status

100% Public Pension Fund 90% 6% Private Sector Pension 2%2% 80% 5% Fund Currently Investing 28% Insurance Company 70% in Real Estate 6% 73% 60% Asset Manager 87% 50% Considering Sovereign Wealth Fund Investing in Real 15% 40% Estate Bank 30% Does Not Invest in 14% Real Estate Superannuation Proportion of Pension Funds 20% Scheme 27% 1% 10% Endowment Plan 23% 13% 0% Other Private Sector Public Pension Pension Funds Funds

Source: Preqin Real Estate Online Source: Preqin Real Estate Online

8 Real Estate Spotlight / September 2016 © 2016 Preqin Ltd. / www.preqin.com View the full edition of Spotlight at: https://www.preqin.com/docs/newsletters/RE/Preqin-Real-Estate-Spotlight-September-2016.pdf  Feature ArticleLead Article Pension Funds Investing in Real Estate Download Data

Europe (45%); however, their public sector allocate to real estate: two-thirds of private also allocates to listed and unlisted funds. counterparts are more concentrated in sector pension funds with less than $1bn ABP, the national civil pension fund of North America than Europe. Pension invest in the asset class. However, public the Netherlands, invests just over 10% of funds in Asia and Rest of World account pension funds do not exhibit this trend, its $400bn in AUM via direct, listed and for only 7% of both private sector and with a consistently large proportion (84%) unlisted investments, making it the largest public pension funds currently investing in of participation. public pension fund active in real estate. real estate. As shown in Fig. 8, public pension funds Largest Investors maintain a higher average current and Assets under Management target allocation to real estate (9.7% and Institutions based in the US and the 10.3% respectively) compared to private As shown in Fig. 5, all of the largest private Netherlands feature prominently as the sector pension funds, which allocate 9.3% sector pension funds (those with over largest allocators to real estate for both and 10.2% respectively. $100bn in AUM invest in the asset class, private sector and public pension funds owing to the sizeable human and capital (Fig. 6 & 7). The largest real estate Route to Market resources available, providing greater allocation by a private sector pension fund capability to source, select and monitor a is from US-based Teachers Insurance and Both private sector and public pension diversiﬁ ed portfolio of properties and fund Annuity Association (TIAA), which invests funds look to gain access to real estate investments. Conversely, smaller private $24.2bn in the asset class primarily in a variety of ways. As shown in Fig. 9, sector pension funds are less likely to through direct investments, although it unlisted investment in real estate funds

Fig. 5: Pension Funds Investing in Real Estate by Assets Fig. 4: Pension Funds Investing in Real Estate by Location under Management

100% 100% 90% 93% 92% 88% 88% 90% 90% 84% 79% 80% 80% 47% 70% 66% 70% 62% North America Private Sector 60% 60% Pension Funds Europe 50% 50%

40% Asia 40%

Real Estate Public Pension 30% Funds 30% 45% Rest of World 31% 20% 20% 10% 10%

Proportion of Pension Funds Investing in 2% 4%

Proportion of Funds Investing in Real Estate 0% 0% 5% 3% Less than $1-9bn $10-49bn $50bn or Private Sector Public Pension $1bn More Pension Funds Funds Assets under Management

Source: Preqin Real Estate Online Source: Preqin Real Estate Online

Fig. 6: Five Largest Private Sector Pension Funds by Current Allocation to Real Estate

Current Allocation to Real Current Allocation Investor Headquarters Estate (% of Total Assets) to Real Estate ($bn) TIAA New York, US 2.8% 24.2 AMF Pensionsförsäkring Stockholm, Sweden 12.5% 7.7 Pension Fund for the Dutch Construction Industry Amsterdam, Netherlands 15.7% 7.2 Metal and Engineering Pension Fund Rijswijk, Netherlands 10.0% 6.6 BT Pension Scheme London, UK 11.2% 6.4

Source: Preqin Real Estate Online

Fig. 7: Five Largest Public Pension Funds by Current Allocation to Real Estate

Current Allocation to Real Current Allocation Investor Headquarters Estate (% of Total Assets) to Real Estate ($bn) ABP Heerlen, Netherlands 10.3% 41.0 CPP Investment Board Toronto, Canada 9.9% 27.6 California Public Employees' Retirement System Sacremento, US 9.1% 27.3 (CalPERS) California State Teachers' Retirement System (CalSTRS) Sacremento, US 13.8% 26.0 PFZW - Care and Welfare Pension Fund Zeist, Netherlands 12.0% 22.1

Source: Preqin Real Estate Online

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remains the most widely used route to Fig. 8: Average Allocation to Real Estate: Private Sector Pension Funds vs. market for both types of pension funds Public Pension Funds (77% and 84% respectively). Private real estate funds suit the many characteristics 12% of these long-term investors, providing low 10.3% correlation with bonds and stocks, while 10.2% 10% 9.7% reducing the sensitivity of investor capital 9.3% to the potential short-term market volatility of listed real estate investment trusts. 8%

Both direct and listed real estate 6% investments are utilized by approximately a third of pension funds. The higher 4% cost and experience required to invest, (As a % of AUM) as well as the illiquid nature of direct Allocation to Real Estate investments, could be reasons behind 2% the lower participation rate. Listed funds can experience short-term volatile price 0% movements in turbulent markets, possibly Private Sector Public Pension Private Sector Public Pension dissuading pension fund investment. Pension Funds Funds Pension Funds Funds Similar proportions (31% and 24% respectively) of public and private sector Current Allocation Target Allocation pension funds also target co-investments; Source: Preqin Real Estate Online both investor types are also currently open to investing alongside a fund manager.

As seen in Fig. 10, the rate of participation routes to market, including direct holdings: Regional Preferences in direct real estate by pension funds has one such investor is Stockholm-based a strong correlation to investor AUM, as AMF Pensionsförsäkring. The private North America is the most targeted would be expected. Just 13% of public sector pension fund invests its $7.7bn investment destination by both private pension funds with less than $1bn in AUM allocation to real estate solely via direct sector and public pension funds, with partake in direct investments, compared acquisitions. 49% and 63% of each investor type with nearly two-thirds of investors with active in the region respectively (Fig. 12). over $50bn in AUM, with this ﬁ gure rising Strategy Preferences Furthermore, nearly half of all private to 82% for private sector pension funds. sector and public pension funds target Overall, there is a general preference of real estate investments in Europe, this is The $820mn City of Fort Lauderdale both private sector and public pension unsurprising given the high concentration Police & Fire Retirement System has funds for lower risk core strategies, as of both public and private sector pension its entire real estate portfolio invested in investors aim to match their long-term funds based in these established regions private real estate funds – an indicator of liabilities with funds generating reliable as well as the amount of institutional- the restricted scope available to smaller income (Fig. 11). However, higher risk quality real estate located in these pension funds and the high barriers in value added real estate strategies are markets. place for direct investment. On the other also utilized by signiﬁ cant proportions of hand, larger pension funds have the both private sector and public pension capability to access real estate through all funds (49% and 60% respectively).

Fig. 9: Pension Funds Investing in Real Estate by Route to Fig. 10: Pension Fund Participation in Direct Real Estate Market by Assets under Management

90% 100% 84% 77% 90% 80% 82% 80% 70% 70% 66% 60% Private Sector 60% Private Sector Pension Funds 54% 50% Pension Funds 50% 43% 40% Public Pension 40% Real Estate 32% 34% 29% 30% 29% Funds 30% Public Pension 30% 30% Funds 22% 20% 20% Proportion of Pension Funds 13% 10% 10%

Proportion of Pension Funds Investing in 0% 0% Less than $1-9bn $10-49bn $50bn or Unlisted Funds Direct Listed Funds $1bn More Route to Market Assets under Management Source: Preqin Real Estate Online Source: Preqin Real Estate Online

10 Real Estate Spotlight / September 2016 © 2016 Preqin Ltd. / www.preqin.com View the full edition of Spotlight at: https://www.preqin.com/docs/newsletters/RE/Preqin-Real-Estate-Spotlight-September-2016.pdf  Feature ArticleLead Article Pension Funds Investing in Real Estate Download Data

Outlook supply of, and increasing demand for, mitigate against fl uctuations in traditional institutional quality assets means that bond and stock markets. Additionally, real Pension funds face a number of gaining exposure for the right price has estate can further diversify investment challenges in the current real estate become increasingly diffi cult for pension portfolios, hedge against infl ation and market: two-thirds (67%) of pension funds and other investors alike. produce a consistent income stream that funds currently view asset prices as a key can be matched against the long-term concern in the industry, while 64% believe Nonetheless, real estate remains a crucial liabilities held by pension funds. it is harder to fi nd attractive opportunities part of many pension fund portfolios, with compared with 12 months ago. A limited investments in the asset class able to

Fig. 11: Strategy Preferences of Pension Funds Investing in Fig. 12: Regional Preferences of Pension Funds Investing Real Estate in Real Estate

90% 70% 84% 63% 80% 75% 60% 70% 49% 48% 60% 50% 46% Private Sector 60% Private Sector Pension Funds 49% 46% Pension Funds 40% 50% 44% 43% 28% 40% 32% 30% 30% Public Pension 22% Public 30% 27% 26% 20% Funds 20% Pension Funds 19% 19% 13% 20% 12% Investing in Real Estate 7% Investing in Real Estate 10% 6% 6% 10% 2% Proportion of Pension Funds 4% 1% Proportion of Pension Funds 0% 0% Asia Debt Core North Europe Value Funds Added Fund of America Markets Emerging Core-Plus Distressed Australasia Central & Secondaries Opportunistic South America

Preferred Strategy Regional Preference Source: Preqin Real Estate Online Source: Preqin Real Estate Online

Fig. 13: Sample of Pension Funds Investing in Real Estate in the Next 12 Months

Investor Type Headquarters Investment Plans for the Next 12 Months Versicherungseinrichtung des In Q3 2016, VeF is planning to invest CHF 30mn in one Private Sector Flugpersonals der Swissair Zurich, Switzerland real estate fund. The fund is seeking an existing fund Pension Fund (VeF) manager in its portfolio operating a core strategy. Stichting Graﬁ sche Private Sector PBF is planning to commit €400mn to three core funds in Amsterdam, Netherlands Bedrijfsfondsen (PBF) Pension Fund the next 12 months. United States Steel and Private Sector Over the next 12 months the pension fund is targeting New York, US Carnegie Pension Fund Pension Fund opportunistic funds on a global basis.

The fund is seeking global exposure to value added, core- City of Pontiac Michigan Public Pension Michigan, US plus or core strategies, planning to commit $20-40mn to Retirement Systems Fund at least one fund.

Kwacha Pension Trust Fund plans to invest Public Pension opportunistically in listed and private real estate funds in Kwacha Pension Trust Fund Lusaka, Zambia Fund the next 12 months; the fund is targeting opportunities in Africa. POBA is seeking opportunities through both separate Public Ofﬁ cials Beneﬁ t Public Pension accounts and private real estate funds over the next 12 Seoul, South Korea Association (POBA) Fund months; the investor has a preference for Europe-focused core strategies.

Source: Preqin Real Estate Online

Data Source:

Preqin’s Real Estate Online currently tracks 1,777 pension funds investing in real estate, providing key information on investment preferences, geographic foci, strategies employed, fund managers invested with, future investment plans, key contact details and more.

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PRIVATE NATURAL HEDGE FUNDS REAL ESTATE INFRASTRUCTURE PRIVATE DEBT EQUITY* RESOURCES INVESTOR COVERAGE 6,297 5,026 5,383 2,804 2,253 2,058 Active Active Active Active Active Active Natural Private Equity Hedge Fund Real Estate Infrastructure Private Debt Resources LPs Investors LPs LPs Investors $ Investors FUND COVERAGE 20,118 22,174 5,848 1,088 2,092 1,567 Private Equity PE Real Estate Infrastructure Private Debt Natural Hedge Funds Funds Funds Funds Funds Resources Funds

FIRM COVERAGE 10,216 8,208 3,578 499 1,082 824 Private Equity Hedge Fund PE Real Estate Infrastructure Private Debt Natural Firms Firms Firms Firms Firms Resources Firms

PERFORMANCE COVERAGE 6,420 14,163 1,569 224 761 442 Private Equity PE Real Infrastructure Private Debt Natural Hedge Funds Funds Estate Funds Funds Funds Resources Funds

FUNDRAISING COVERAGE 2,234 15,828 1,013 200 291 261 Private Equity PE Real Infrastructure Private Debt Natural Hedge Funds Funds Estate Funds Funds Funds Resources Funds

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