Survey: Real estate rules alternatives universe

Real estate still dominates the alternatives universe, representing 28 percent of the $4.9 trillion in global alternative assets under management and 35 percent of the assets of the 100 largest alternative investment managers, according to the Global Alternatives Survey 2012 from New York-based consulting firm Towers Watson.

“The on-going global economic crisis has driven all types of institutional investors towards having more diversified investment portfolios, with investment managers offering significant alternatives capabilities being the clear beneficiaries,” said Craig Baker, global head of research at Towers Watson, in a statement. He noted that allocations to alternative assets now account for 20 percent of all pension fund assets globally, up from just five percent 15 years ago.

Real estate continued to represent the largest share of alternative investments, accounting for 28 percent, followed by private equity and hedge funds, which comprised 21 percent and 23 percent, respectively. This year’s survey marked the first time that the New York-based consulting firm included individual private equity and hedge fund managers, as well as data on institutional investors outside of pension funds.

The reason for real estate’s relative strength in the alternatives universe is the capacity constraints in other alternative asset classes, Luba Nikulina, global head of private markets at Towers Watson, told PERE. With private equity and hedge funds, which typically look for investments that generate high returns, “you need to have certain dislocations or mispriced securities to be able to execute,” she explained.

With real estate, however, “you have this whole range,” where investors can invest for returns through an opportunistic strategy, for returns or diversification through a value-added strategy and for diversification through core, said Nikulina. “The universe of underlying assets is much wider, and there are fewer capacity constraints in real estate.”

The expansion of the survey’s data set increased total global alternative assets under management tracked by the firm from $2.3 trillion in 2010 to nearly $5 trillion in 2011. Real estate managers’ share of those assets also rose from $1.12 trillion to $1.38 trillion during that period, as the number of such managers participating in the survey grew from 71 to 86.

Among the 35 real estate managers who have participated in the survey for the past five years, however, total AUM has declined by 3.68 percent over the period. “This is still the aftermath of the financial crisis, where there was a significant drop in the value of real estate assets and there has been a certain degree of risk aversion from the institutional investor community,” said Nikulina. “As a result of risk aversion, you could see some of the assets increasing in value, while others are being undervalued.”

Real estate managers also continued to have the largest share – 52 percent – of pension funds’ alternative assets, which rose by around 8 percent to $1 trillion in 2011, according to Towers Watson’s research. This was followed by private equity fund of funds at 23 percent and infrastructure and fund of hedge funds, both at 11 percent.

“Pension funds have always been and will remain a very large client group for top alternatives managers, but the demand from non-pension investors, such as sovereign wealth funds, is only going to increase in the future,” said Baker. Pension fund assets represented one third of the assets managed by the 100 largest alternatives managers, as ranked by AUM, with the remainder coming from insurance companies, sovereign wealth funds and endowments and foundations.

Los Angeles-based CBRE Global Investors, with $94 billion in AUM, topped the ranking of overall alternatives managers, as well as being the largest real estate manager in the survey. Real estate firms accounted for 11 of the top 25 managers and included such firms as Brookfield Asset Management, UBS Global Asset Management, RREEF and Morgan Stanley Real Estate Investing.