The Core of the Matter
BHA’s recent conversations with several large institutional investors in the U.S. and Europe suggest that core real estate funds will be in high demand throughout the remainder of 2010. Whether looking to balance their portfolios or establish sector and geographic diversification, institutional investors are tracking the more stable real estate strategy inherent in core funds. When these investors will pull the trigger on new commitments is difficult to gauge, however, as some are waiting for the market to bottom out and others are waiting for more liquidity from existing investments.
An investment officer on the real estate team of a large state pension fund in the U.S. recently told BHA that the board has asked the team to switch gears and put more of an emphasis on core and core-plus real estate strategies. The pension fund has more than $1 billion in outstanding commitments to value-added and opportunistic investments, and its mandate over the next few years is to balance its portfolio by increasing investments in core funds. Still, the pension plan is in no rush to make new commitments as it believes the real estate market has yet to bottom out. When the firm begins to target more core investments in 2011, its focus will be on the U.S., as there are plenty of opportunities to take advantage of domestically.
A U.S. endowment based in the Mid-Atlantic region is looking to make new commitments toward the end of 2010 and beginning of 2011. It specifically mentioned an interest in industrial property, a market that it currently has no exposure to. Industrial real estate offers investors some cash flow stability due to the lease terms that are created and the low turnover rate. Tenants in industrial buildings tend to sign longer leases and vacate their buildings less frequently because of the high costs of transporting or moving their equipment. Even in this type of economic environment, tenant turnover remains relatively low, providing more stable returns for investors.
U.S.-focused core real estate investments are on the horizon for several European pension funds as well. In some cases, investors are focusing exclusively on this segment of the market. A corporate pension plan based in the Netherlands that has historically invested in European markets only is expanding its portfolio to include exposure to the U.S. market. This investor’s current search centers on core, unleveraged strategies as the investor is looking for the least amount of risk. The firm hopes to make one to two investments by the end of 2010.
What these institutions have in common is their belief that investment in real estate is essential to maintaining a strong portfolio, as it provides a return stream that is uncorrelated to equities and fixed income. Core strategies are especially popular at this time because some investors have found themselves overweight in value-added and opportunistic commitments. Additionally, the low level of risk is just what they are looking for when expanding into new regions and sectors of the real estate market.