For many of the world’s largest institutional investors in real estate, it is the public, rather than the private, side of the asset class that has become increasingly important during the covid-19 crisis.
This point was driven home by several institutional heavyweights during the PERE Europe virtual event this week. As Karsten Kallevig, special advisor to the chief executive at Norwegian sovereign wealth fund steward Norges Bank Investment Management, remarked during a keynote interview: “The listed world is getting more and more important for bigger institutions.”
For NBIM, the listed market offers advantages that the unlisted market does not: liquidity and the ability to change exposure relatively quickly. On the private side, selling billions of dollars in assets can take at best months, but sometimes years, he noted.
The significance of listed real estate has accelerated during the pandemic. Andrea Orlandi, head of real estate in Europe at the Canada Pension Plan Investment Board, said during an investor panel that the public pension plan’s listed real estate program, launched a year and a half ago, has grown rapidly during covid-19 and “allows us to get over the hump of not being able to visit properties in many cases.”
Orlandi said investing in the public real estate markets involves far fewer transaction costs than on the private side and offers the ability to achieve scale and a desired level of exposure more seamlessly. By contrast, quality private real estate assets do not trade frequently, which results in institutions bidding against each other for the same property.
Patrick Kanters, head of real assets at APG Asset Management, agreed the public markets have become another important way to invest in the property sector. Indeed, he saw the private versus public debate as “old economy” versus “new economy”. The open-ended private real estate market in the US, for example, provides exposure to the “old economy” and traditional property sectors, he noted. Listed real estate, meanwhile, allows APG to gain exposure to a broad variety of sectors representing the “new economy,” such as healthcare, self-storage and data centers. As Kanters observed, “the variety on the listed end has really helped us to further shape that portfolio to invest in the future.”
Whereas the NCREIF Fund Index – Open End Diversified Core Equity funds comprise 90 percent office, retail, multifamily and industrial, traditional sectors only account for about 40 percent of the REIT space, according to the National Association of Real Estate Investment Trusts.
An institutional property portfolio with listed real estate as a key component would not have been possible a couple of decades ago, Kallevig added. This is because so-called alternative sectors like student housing or data centers were not investable strategies then. But many sophisticated operators today can offer exposure to those sectors.
Arguably the most compelling reason for listed real estate to assume greater relevance for institutional money comes in its relatively better performance: equity REITs delivered an aggregate net return to defined benefit pensions of 10.17 percent between 1998 and 2018, compared with 8.66 percent for unlisted real estate, according to data provider CEM Benchmarking.
With performances like this, current weightings from institutional capital do not look appropriate. The average allocation for US defined benefit plans was 5.19 percent to unlisted real estate, 0.78 percent to listed equity REITs in 2018, CEM data showed.
Likely, greater exposure to listed real estate will not come at the expense of private investment, but as a further supplement. Indeed, the three investors speaking on the topic at PERE Europe stressed the importance of having both public and private real estate exposures in their portfolio. Orlandi said being allocated to both sides of the asset class allows an investor to better compare value and develop greater investment discipline, while Kanters noted public and private each have a role to play in a property portfolio, and only through both can an investor fully access the universe of potential investments.
Expect to see greater weightings to listed real estate from the world’s biggest institutional investors in 2021 as the sector takes lessons from the pandemic and takes yet another step in its sophistication.