PGIM Real Estate is anticipating growth in new geographical areas for real estate investments in the defined contribution space, according to David Skinner, global head of the strategy for the firm.
In the US, for example, PGIM Real Estate is thinking about launching a defined contribution (DC) private commercial real estate debt strategy, Skinner told PERE. The debt vehicle would seek to mirror the firm’s existing defined contribution real estate funds, which include allocations to open-ended equity strategies as well as public real estate securities that provide daily valuations and liquidity.
Skinner was named to the new role of global head to help lead the defined contribution practice’s expansion into new geographical markets, starting with the UK. Skinner will spend the next 12 months evaluating the market opportunities in the UK and continuing to build out new strategies tailored to different regional markets. He expects the focus will then turn to Asia in the next 12-18 months. The Australian market already has defined contribution schemes from various firms investing in private real estate, and the broader Asia DC market is ready for expansion, according to Skinner.
PGIM also hired Sara Shean as executive director this month. Shean, formerly the institutional defined contribution vice president at Cohen & Steers, will report to Skinner.
PGIM Real Estate entered the defined contribution space in 2006, offering investment vehicles to defined contribution plan sponsors and consultants. It currently offers two hybrid fund of funds vehicles, which combine private real estate investments with public real estate securities and offer daily liquidity. Over the last 12 years, PGIM Real Estate’s defined contribution platform had expanded to more than $2.2 billion in assets under management as of June 30.
Defined Contribution Real Estate Council co-president Jennifer Perkins has seen US defined contribution plans show increased interest in real estate investments in the last few years. This can partly be attributed to the increasing adoption of defined contribution plans. Defined contribution schemes have become mainstream over the last five years as companies started replacing the more traditional defined benefit plans with defined contribution plans, which are less costly for employers since individual employees are largely responsible for funding their retirement savings, she said.
Defined contribution schemes are also starting to catch on in the UK market, according to Skinner. While defined contribution market is still in its early stages, he predicts the UK will present similar private real estate investment opportunities as the US in the next few years. The UK’s DC workplace market holds an estimated £338 billion ($440.68 billion, €383.33 billion) in assets today, and the growth of assets is expected to be 10 percent annually over the next decade to £870 billion ($1.13 trillion, €986.96 billion), according to the Real Estate Investment in Defined Contribution Pension Schemes report published in March by IPF Research Programme. By 2026, the study predicts property investments held in workplace DC plans will balloon to £47 billion ($61.27 billion, €53.31 billion) from £6.2 billion ($8.08 billion, €7.03 billion) currently.
“As other DC plans [in other countries] achieve scale, I think it wouldn’t be surprising to see them look more like the Australian model, which in general has quite a large allocation to private real estate,” said James Veneruso, senior vice president and defined contribution consultant in Callan’s fund sponsor consulting group. Australia has the highest proportion in defined contribution assets out of the world’s seven largest pension markets, with 87 percent of retirement assets in DC plans, compared to 13 percent in DB plans, according to Willis Towers Watson’s Global Pensions Asset Study 2018.
However, most DC markets still face challenges when it comes to private real estate investments. Most DC plans don’t yet have the scale to fully take advantage of private real estate investments, Veneruso said.
Such plans require a large number of participants in the retirement scheme to meet capital commitment requirements associated with private real estate investments and absorb what can be higher manager fees compared to more passive investment strategies, according to Veneruso. Fees tend to decrease as the pool of commitments increases.
On the operational side, the asset class traditionally does not provide the daily valuations and liquidity that DC plans demand, he added. Before DC plans can really step into private real estate investments on a large scale, they will have to first find a way to address scale and operational issues, Veneruso said.