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Real value

Some LPs are seeing the value of a broader real asset allocation, but that doesn’t mean real estate necessarily will suffer as a result.


News announced earlier this week that TIAA-CREF had received $2 billion in commitments to invest in farmland in the US, Australia and Brazil could be indicative of a move by a number of global investors to diversify their portfolios to include not just real estate but also a broader-reaching  array of ‘real assets’. 

Real assets are tangible assets that have intrinsic value, as opposed to financial assets, such as stocks, bonds or options. Although not every investor is changing its thinking on the subject, a number of investors have begun to assemble large portfolios that consist of these more broad-reaching real assets, which can include infrastructure, timber, energy, agriculture and transportation assets in addition to real estate. 

The question is whether such a larger mixed allocation will help or hurt the private equity real estate space. In other words, is it better for the real estate sector if investors separate their allocations or if real estate investments are lumped together with other assets? 

This strategy of lumping real estate investments with other real assets—adopted by such institutions as the Ontario Teachers’ Pension Plan, the Alaska Permanent Fund, the Missouri State Employees Retirement System and the Teacher Retirement System of Texas—can be a good way to hedge risk and diversify one’s portfolio, provided the management team knows what it’s doing. 

Take, for example, TIAA-CREF Global Agriculture, the aforementioned farmland investment initiative established by TIAA-CREF. According to the New York-based financial services firm, investing in farmland offers real estate investors a substantial amount of diversification in their portfolios. Investing in farmland also can serve as hedge against inflation within an LP’s investment portfolio.

This global agriculture venture from TIAA-CREF isn’t just some anomaly. A forthcoming report from JPMorgan Asset Management predicts that real assets are likely to move from an alternative to a mainstream asset class. In fact, investor allocations could rise from roughly 5 percent to 10 percent today to as much as 25 percent in the next decade. 

So what are the major advantages? Why are some LPs adopting this investment strategy and, more importantly, why should more do so? 

In addition to providing diversification to an investment portfolio and hedging risk, lumping real estate with other global real assets can generate yields that are competitive with other fixed-income alternatives. Real assets’ payment structure can provide a reliable base for stable mid- to long-term total returns by contributing to price appreciation in rising markets and offsetting losses when values decline. 

When it comes to real assets, however, management is critical. There are different due diligence factors for investments in real estate that there are in timber or energy, so it’s essential that an investor’s management team has the expertise in place to navigate the different rules, risks and regulations associated with each different asset. That said, provided it knows what it’s doing, the LP that introduces timber, agriculture or energy to its real estate investment portfolio may enjoy some long-term gains that its fellow non-diversifying LPs may not necessarily experience. 

Furthermore, there’s no indication that investing in a broader real asset allocation will have an adverse effect on real estate. In fact, a more diverse portfolio with mitigated risk could lead to greater exposure to real estate, as well as help those secondary real asset classes get some love as well.