AMERICAS NEWS: Creditable opportunity

Like all institutional investors, Allstate Investments wants opportunistic returns for taking core-like risk. Unlike all institutional investors, perhaps, it may have found a way of achieving just that.

As the investment management arm of the US insurance firm looks to roughly double its real estate exposure over the next two to three years, Allstate’s head of real estate equity, Edgar Alvarado, believes he has found one niche strategy that could deliver IRRs of up to 17 percent in return for bond-like risks – low income housing tax credits (LIHTC).

Real estate today is about making sure you don’t put all your eggs in one basket.

Allstate Investment head of real estate equity, Edgar Alvarado

LIHTCs, like all asset classes, have experienced a dramatic shake-out in the wake of the financial crisis.

Used by developers to raise equity financing for projects, the tax credits are an indirect federal subsidy designed to create market incentives for the purchase, development and renovation of affordable rental housing. Developers have traditionally sold the credits to fund managers, who have in turn pooled them into 10-year closed-ended real estate limited partnerships, and sold them onto taxable LPs, usually banks, to help offset tax liabilities.

However, with banks largely out of the equation as they nurse their balance sheet wounds, a void has emerged in the LIHTC market – a void Allstate is starting to help fill. “The financial crisis saw roughly two-thirds of the capital disappear from the sector, pushing yields up from just 5 percent to as high as 16 percent to 17 percent,” Alvarado said.

Allstate plans to invest $400 million in the sector over the next 12 to 18 months and could commit up to $1 billion of equity (the insurance company’s tax liability cap) if conditions remain attractive.

Having closely watched the sector for the past year, Alvarado accepted the tax credit opportunity was not a long-term play, with Allstate expected to retreat from the opportunity if IRRs fell short of 10 percent. “This is a timing opportunity that might last just two to three years,” he said. “But you’ll get some very attractive returns with very low risk in the meantime.”

Allstate is not betting on one real estate strategy though. The Northbrook, Illinois-based firm is also eyeing emerging markets, particularly Brazil, as it looks to grow and diversify its real estate portfolio from $2 billion, including unfunded commitments today, to between $4 billion and $5 billion in the next two to three years.

The firm has already invested in two Brazil-focused fund managers, with a third commitment due to close at the time of press. Alvarado said Allstate wanted to take advantage of Brazil’s macro economic health, as well as the country’s demographic trends, and would in the future shift its focus to Asia for possible fund of funds investment, although he accepted the region presented “huge challenges” for LPs.

“Real estate today is about making sure you don’t put all your eggs in one basket,” Alvarado said, revealing Allstate was also planning to invest $500 million in global and domestic REITs over the next two to three years, though currently that strategy has been put on hold due to a negative short term outlook on public equities.