The Nebraska Investment Council (NIC) is considering diversifying its real estate portfolio to include more debt investments, given a current abundance of such opportunities in the commercial real estate market, according to one of its investment consultants.
“NIC’s portfolio is mostly focused on real estate equity investments today and could likely benefit from increased exposure to real estate debt,” investment consultant Hewitt EnnisKnupp stated in a presentation at a board meeting this week.
Private equity investments currently comprise 93 percent of Nebraska’s portfolio, with an additional 3 percent invested in public equity and 4 percent in private debt, according to the presentation. NIC currently has made just one debt investment through Almanac Realty Investors’ Almanac Realty Securities V, a vehicle through which investments are structured as convertible debt.
NIC recently reached its real estate allocation target, which is 5 percent of its total $16 billion of investments. Jeffrey States, the state investment officer, told PERE that he did not expect the council to increase the allocation to real estate without conducting a new asset/liability study, which has not been scheduled at this time. Therefore he said: “We would have to reallocate the current investments to add exposure to debt without increasing the asset allocation.” If and when the council were to make a debt investment, it would most likely be through a fund, he added.
Real estate debt accounts for more than half of the real estate investment market, with about $2 trillion in private debt and $0.8 trillion in public debt, Hewitt EnnisKnupp’s presentation said. Private real estate equity, by contrast, is a $0.7 trillion market.
Potential debt investments would include participating first mortgages that yield returns similar to fixed income; as well as non-core, tactical debt options that would be higher on the risk/return spectrum and take advantage of current market dislocations. Within real estate, NIC has a 60 percent allocation to core investments, with the remainder in non-core.
Real estate debt generally is considered a lower risk investment, because “debt’s claim on cash flows, residual value and asset collateral is senior to equity and thus can better withstand a downturn in asset valuations,” Hennis EnnisKnupp said in the presentation. Additionally, debt offers a greater percentage of return based on income, as compared to equity; inflation hedge potential; and multiple investment options at various risk levels.
Nebraska is the latest state to look at real estate debt investments, following the lead of US pension funds such as the Los Angeles County Employees Retirement Association and the Florida State Administration, which in recent years have begun investing in debt through structures such as separate accounts or funds.