For many real estate investors, liquidity is ‘outside of our control’

Investors face an unusual predicament today – wanting to see more realizations in their real estate portfolios while having few viable exit options, said speakers at the PERE Network America Forum in New York last week.

“Never before have I heard what I’m hearing today from investors, which is, ‘I need some realizations. I need to harvest in order to bring down the overallocation. But I’m also a little bit nervous to see those harvests because I’m worried about the mark-to-market that I’m going to see in the rest of my portfolio,’” said Jeffrey Fine, Goldman Sachs Asset Management’s global head of real estate client solutions and capital markets (seated left), moderating a panel session on institutional investors’ capital allocations on day one of the conference.

Sajith Ranasinghe, managing director of global real estate at The Church Pension Fund (seated center left), the pension fund for The Episcopal Church, said his organization does not invest through separately managed accounts and therefore was not in the driver’s seat regarding when property investments in its portfolio were realized.

“We’d like to always get more distributions, but that’s obviously outside of our control,” he said during the panel. “We’re very grateful for some of our partners that just hit the bid in Q4 2021. And there’s one group in particular that literally sold 80 percent of the NAV they had. But a distribution we get today is just worth more than the ones we got in Q4 2021, because the opportunity to reinvest that capital is just higher today. So our partners will ultimately decide on the go-forward return and determine whether to hit the bid on an exit or not.”

By comparison, Oregon State Treasury, whose real estate portfolio is two-thirds invested in separate accounts, has more control over exit timing. Nonetheless, investment officer Chris Ebersole (seated center right) acknowledged the pension plan has assets, primarily in office, that are not likely to result in any liquidity for the investor. Still, “we would just as soon get those off the books,” he said. “And so we’re pushing the managers to do what they can on those. We’ve lost one to the bank in the spring, and there’s probably a couple more to go.”

On a more positive note, Oregon State Treasury has also benefited from a number of opportunistic sales, primarily in industrial, where managers have been approached by buyers with attractive offers. “We’re saying, ‘sell,’” said Ebersole, whose organization expects to put out about one-third of its typical commitment volume in recent years. “It’s not because we have a better place to put the capital right now, but it helps us with our overall liquidity picture.”

In contrast to Oregon State Treasury, which is overallocated to real estate, Norges Bank Investment Management has plenty of capital to put out in the asset class. NBIM, which manages the investments of the world’s largest sovereign wealth fund, Government Pension Fund Global, now has nearly $30 billion of additional equity to deploy into the market after increasing its real estate allocation target from 5 percent to 7 percent in December 2022.

However, like the US public pension, NBIM also has office investments it would like to sell. “Unfortunately for us, a lot of our office investments are larger office investments, and there’s very limited liquidity in the US office market right now, in general, and there’s not large parts of the office market [where] you want to sell something that’s of significant scale,” explained Ed Lerum, head of global logistics real estate at NBIM (seated right). “So we would if we could, but that’s not really an option at the moment.”

Meanwhile, “this environment is making us think a lot harder about liquidity in the future,” added Lerum. “With our current holdings in our current ventures, we’re certainly spending a lot of time thinking about positioning those situations for liquidity better in the future. So there’s a lot of work going into that. And for anything new we do, before we enter into that, we’ll spend a great deal of time on those situations also thinking about liquidity in the future.”

Last week, NBIM announced its first real estate acquisition of 2023, with an agreement to purchase a 45 percent interest in two life sciences development properties located in Kendall Square in Cambridge, Massachusetts, at a gross valuation of approximately $1.66 billion.

When it came to deploying new capital, all three panelists believed the industry was in the early stages of a market correction. “I don’t think that means that there’s not good buying opportunities right now, but just for how everything’s going unfold, there’s this whole loan issue that is just super early,” Lerum said. “There’s uncertainty overall.”

Meanwhile, Ebersole offered what he called “the Portland analogy,” where people are lined up around the block for the latest donut shop that has opened in town. “That’s what it feels like, everybody’s got the capital, everybody’s waiting,” he said. “Nobody really knows what they’re buying, but they think it’s going to be good.”