Allstate Investments has committed $210 million to three US-focused, open-ended, core real estate funds as it seeks to reduce its exposure to opportunistic real estate investments in favour of deploying capital to income-producing assets.
The Northbrook, Illinois-based investment management arm of US insurer Allstate, which currently manages $10 billion in real estate equity and commercial mortgages, will invest $70 million each in Morgan Stanley’s Prime Property Fund, Clarion Partners’ Lion Properties Fund and Invesco Real Estate’s Core Real Estate Fund. Morgan Stanley and Invesco had raised $7.3 billion and $3.76 billion, respectively, as of January, while Clarion had closed on a total of $3.76 billion last November, according to SEC filings.
Allstate is one of several institutional investors, which also includes the California Public Employees Retirement System and the California State Teachers Retirement System, that is shifting its real estate strategy to income-producing assets, as it increasingly seeks investments that offer current cash yields but are less volatile than public equities.
“Income is the driver,” said Edgar Alvarado, group head of real estate equity at Allstate, which plans to expand its real estate equity investment portfolio to about $4 billion to $5 billion in the next three years. As part of its strategy to generate more current income, the firm is planning to invest the vast majority of the $2.5 billion that it plans to deploy over the next three years in core and core-plus assets. Allstate’s real estate portfolio, which currently is evenly split between opportunistic and non-opportunistic assets, is expected to shift to 80 percent to 90 percent core, core-plus and value-added investments within the next two to three years.
Open-ended core funds typically generate a 4 percent to 6 percent cash yield. “For an institutional investor, that’s a very attractive place to put money to work,” said Alvarado. By contrast, opportunistic funds don’t generate current cash flows and income and have a much shorter hold period for assets.
With a greater focus on income, Allstate has centred its real estate strategy in the US on direct investments –either through separate accounts, joint ventures and co-investments – while investing internationally through commingled funds. “We think there’s more money to be had by going direct,” said Alvarado. “We have much more control in terms of major decisions, and we’re much more involved in terms of operation decisions.”
However, the new core fund commitments are considered to be complementary to Allstate’s direct investments drive, which “takes time to build out” in terms of structuring, negotiations and documentation, Alvarado said. Meanwhile, core funds “build up book value and generate income quickly.”
The new fund commitments currently are the only core real estate funds in Allstate’s portfolio, aside from a JPMorgan core vehicle in which it invested last year – and are likely to be the only core funds to which it will allocate capital this year.
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