The world’s biggest property fund might get 50% bigger

JPMorgan Asset Management’s Strategic Property Fund has long
reigned as the largest commingled real estate fund, with a current net asset value of approximately $33 billion and gross asset value of approximately $43 billion.

Dominant in the core real estate market, the vehicle dwarfs rivals in
the NCREIF Fund Index – Open‐end Diversified Core Equity index, which includes 25 funds totaling $206.7 billion of net real estate assets and $247.9 billion of gross real estate assets. For example, PGIM Real Estate’s PRISA I had a NAV of $19.7 billion and GAV of $24.5 billion as of December 31, according to an April presentation to the Bay County Employees’ Retirement System. Another, UBS Realty Investors’ UBS
Trumbull Property Fund, considered a close competitor of SPF, reported a NAV of $19.2 billion and GAV of $23.5 billion as of March 31 in an April presentation to the City of Naples General, Police and Fire Pension Plans.

Now, SPF stands to become even larger, as JPMAM starts allowing foreign investors into the fund for the first time in the vehicle’s 20-year history. The firm will begin accepting commitments from overseas institutions by mid-2019, according to one source familiar with the matter. Their actual inclusion may take longer. Because SPF is understood to have a queue of three to four quarters, the foreign investors may not actually become limited partners until 2020, another source said. JPMAM declined to comment.

In the meantime, a mass educating exercise is happening. Given the
Strategic Property Fund has hundreds of investors, the bank platform has had to start updating existing investors of the change from three to six months ago, one source familiar with the matter said.

“This has been years in the making for them,” the source added. Indeed, the firm began discussing the change with some investors as early as a couple of years ago, another source told PERE. The vehicle counts many of the largest US public pension plans among its limited partners, including the New York State Common Retirement
Fund, the California State Teachers’ Retirement System and Oregon State Treasury.

The New York-based asset manager launched SPF in 1998, originally
structured as an open-ended core vehicle to only include US investors.
But while it is one of the dominant property funds of its kind in the country, it has been among the last to open to foreign capital. The majority of the funds in the ODCE index either have already made the change to allow foreign investment or are later entrants to core real estate and consequently had always been structured to accept foreign capital for maximum flexibility, according to executives familiar with the funds.

In the case of SPF, “they never had any need to accept capital from
foreign sources, but they don’t want to be completely shut out from that,” one person said. “A lot of the [foreign] investors have proactively reached out to them, and that is what has driven them to accept it.”

‘Now they will get a wave of capital’

The change comes at a time when more foreign investors are eyeing
entries into US core real estate, most recently, the Japanese institutions that are re-engaging the asset class after a decades-long absence. The world’s largest pension fund, Japan’s GPIF, with ¥158.6 trillion ($1.4 trillion; €1.2 trillion) in total assets under management,
just awarded its first mandate in the asset class to CBRE Global Investors in September.

One person familiar with SPF believes the potential commitments from
Japanese capital could be significant and lead SPF to grow to $60 billion in GAV over the next few years. Another source agreed the fund could raise “billions” and called the change “a good move.” However, he added: “The timing isn’t the best. They should have opened it up
several years ago. Now they will get a wave of capital at the end of the cycle.”

Others doubt the fund would see such aggressive growth in a short period of time, however. “Foreign investors are never going to be a big portion of the fund,” said one source who works closely with Japanese investors.

The Japanese institutions interested in committing to SPF would not want to have a lot of capital concentrated with one manager, he said. Such investors would likely be writing checks from $50 million to $200 million in size, with a sweet spot of $75 million. Estimating some two dozen overseas investors would likely commit to the fund, he did not expect the aggregate amount of foreign capital coming into the fund to
be substantial.

Another source also did not see pent-up demand from foreign investors
for the fund, noting that some large overseas institutions may prefer to be in separate accounts for greater control. He anticipated most of the overseas capital backing Strategic Property Fund would likely come from investors transferring from other ODCE funds.

Even if overseas interest in SPF were significant, one consultant believed JPMAM would not allow a massive influx of foreign capital into the fund, as pressure to invest at the current stage of the real estate cycle would lead to a reduction in the quality of the fund’s investments. “It will completely tarnish what they’re doing,” he said. Moreover,
if the firm has difficulty putting capital to work and is unable to find suitable investments, this lack of deployment could lead to an increase in redemptions.

SPF is JPMorgan’s property vehicle for investing in high-quality stabilized office, retail, residential and industrial assets in primary markets in the US. Among SPF’s most prominent assets were the International Toy Center at 200 Fifth Avenue in New York, the Landmark Center in Boston, and Century Park in Los Angeles.

Another critical factor for assessing the fund’s attractiveness is its performance versus peers. The fund has been lagging industry benchmarks as of late amid moderating returns, which have been falling from a high of 11.51 percent over the last five years, according to a quarterly review report from Callan Associates in December 2017. SPF generated a 1.79 percent return for the fourth quarter 2017, ranking in the 38th percentile of the Callan Open End Core Commingled Real Estate group for the quarter and in the 44th percentile for the last year, the report said. The vehicle also underperformed the NCREIF NFI-ODCE index on a value-weighted gross basis by 0.28 percent for the quarter and by 0.44 percent for the year.

Whether international investors jostle for position in SPF will be known
next year. Regardless, the possibility of now committing meaningful capital to the world’s biggest property fund, and to the world’s biggest property market, will be a discussion point high on the agendas for all non-US institutions serious about growing their allocations in the sector.