Bob Steers (right) is a pioneer of today’s listed real estate market and will one day hand over the reins of Cohen & Steers to Joe Harvey (left)
In February this year, Bob Steers, who co-founded Cohen & Steers in 1986, suffered a brain aneurysm and was forced to take medical leave. But you would not know that by just talking to the veteran real estate pioneer today.
He is particularly animated about the current potential for the listed property markets in Europe, which remain dwarfed by their US counterpart but which he says are “at a really exciting point”.
The other point of enthusiasm is the potential role of Cohen & Steers in the “interplay between listed and unlisted” real estate. The company is synonymous with real estate investment trusts (REITs) and public real estate more generally, but over the years it has evolved and move into listed real assets more broadly, and this year signalled a side-step into private real estate with the appointment of James Corl.
The genesis of Cohen & Steers was in the acceleration of US REITs in the 1990s, following the savings-and-loan crisis. During the previous decade, Steers and his co-founder Martin Cohen began running the first-ever real estate mutual fund. In 1986, the two hoped that the passing of the Tax Reform Act would be the “catalyst to securitisation of real estate in the US”. Steers says: “Our view was that if Wall Street was good at anything, it was putting a value on an income stream, and real estate, if nothing else, is an income-oriented investment. And so we started the company in ’86.”
However, then came the market crash of 1987, a downturn that lasted into the early 1990s, and the creation of the Resolution Trust Corporation (RTC) to deal with foreclosures. This turned out to be the real catalyst. “There was an explosion of IPOs, which provided the equity for a lot of family businesses and others that would otherwise have gone bankrupt,” Steers recalls. “That was the saying back then: don’t go broke, go public.”
He says: “We never lost faith. It took five to seven years to validate the concept. And our view at that time was, we can’t impact market psychology and what Wall Street will do, but we believed we’d ultimately be proven correct. And so we just focused singularly on generating investment performance during that time [so that] when the markets decided they were interested in adding listed to their asset allocations, we wanted it to be obvious who the top player was. That mentality has persisted with our firm.”
By the end of August of this year, Cohen & Steers hit its highest level of assets under management (AUM) of just over $100bn (€85bn). During the decades building up to that point, Cohen & Steers has remained focused on real estate – and more latterly real assets – rather than going down the route of multiple asset classes, or the “supermarket model”, as Steers terms it.
“The supermarket model is distinctly different in that it almost concedes that most of your strategies will be out of favour or uninteresting for a period of time – but they always want something to sell.” This can lead to the “mentality that you’re in the business of selling, as opposed to the business of generating alpha for your clients”, he says.
Joseph Harvey, president of Cohen & Steers, steps in to remind that the company’s flagship real estate mutual fund has just celebrated its 30-year anniversary, producing annualised returns – net of fees – of 11.8%. “REITs in the US have generated spectacular returns,” he says. “If you’re a real estate investor, you’ve got to at least pay attention to that – while recognising that you have liquidity compared with the private property market. It’s really something you can’t ignore.”
Harvey is expected to eventually take the CEO role in the future and was acting CEO during Steers’ medical absence this year. He has been with the company from early on, joining as a REIT analyst in 1992, before becoming a portfolio manager and then CIO from 2003 to 2019.
Since Cohen effectively retired and became chairman of the company in 2016, Cohen & Steers has had “a very committed focus on succession planning”, Steers says. “We had shared publicly that Joe is identified as my successor and, for the three months that I had to be on medical leave, Joe and the executive committee as a whole demonstrated the success of our succession planning process, because the company didn’t skip a beat… He’s demonstrated this year he’s ready to go, and so at some point in the not-too-distant future, he’ll assume permanent CEO.”
Harvey responds: “This is an investment firm and we are going to succeed or not based on our investment performance… In my 29 years, we’ve seen three or four pretty nasty bear markets and a global financial crisis, a pandemic, tech bust – you name it. So, fortunately, I carry all the experience and lessons from that.”
Steers highlights one of the important lessons learned over the years since the early days of the company. “In addition to being in the business of generating alpha, we’re also in the business of educating – because we had to be.” He cites what is now a “library of white papers” produced by Cohen & Steers on the asset class.
“We’ve come a long way from pension funds basically laughing at listed back in the ‘80s, and ‘90s,” he says. “In the States now, it’s quite typical for pension funds to have listed and unlisted complementing one another. And we’re seeing some really interesting strategies.”
These include “completion portfolios” where pension funds with existing unlisted core property holdings are able to rebalance or expand their exposure to new property types and markets without resorting to selling down illiquid assets.
“When we started, listed in the US was about $6bn in market cap in total and now it’s a $2trn global market. So you’ve got the liquidity, you’ve got the breadth of property sectors and that lends itself to a whole host of strategies – from traditional core portfolios to completion portfolios and very focused, targeted by property type and geography.”
European institutional investors have been slower in adopting listed real estate, he admits. “Even today, its growth varies depending on geography,” he says. “We are seeing in Germany, for example, some significant adoption. In the UK, it’s still slow.” In 2019, Cohen & Steers was hired by Germany’s largest pension fund BVK to invest in REITs.
“As Bob said, in the US we’ve seen investors become much more agile – to go to where the best opportunity is,” Harvey says. “I think that’s a huge statement about the acceptance of the listed market and in terms of having a place in a real estate allocation.
“If you go back to the beginning of the pandemic, in early 2020, as the markets were falling precipitously, we had clients and prospects calling us up to work with them, because that’s where the best deal was,” he recalls. “There were a lot of allocations made through that period, but it’s a by-product of that 30 years of education and performance.”
Europe is definitely following in the footsteps of the US, Harvey says. “They’ve copied some of the things that have worked in the US and, as a result, the returns have been good. The listed market has trounced the private core funds in Europe, and I think that’s going to resolve in a similar dynamic of greater acceptance of [listed] allocations.”
“In addition to being in the business of generating alpha, we’re also in the business of educating” - Bob steers
Two and half years ago Cohen & Steers saw “the light switch go on”. Harvey says: “Germans started allocating to the listed markets as did Middle Eastern institutions, sovereign wealth-type plans. They have been making major allocations, not just to listed real estate but also to listed infrastructure.”
Asked about the rationale for expanding into infrastructure and real assets more broadly, Steers says: “The impetus to initiate an infrastructure team in the early 2000s was in response to our clients, where they had, throughout the ’90s and into the early 2000s, such a phenomenal experience with real estate both listed and unlisted,” he says. “Oftentimes, they were maxed out on their allocations and they were looking for other investments that had similar return-and-diversification benefits.
“And I think that’s when the term real assets really was born. Because before the 2000s, it was really just real estate. And so that’s when we started to build our infrastructure team, not unlike when we started the firm in ‘86. It was well in advance of any groundswell of investor interest. We were just listening to clients.
He adds: “Again, we published a lot of research because listed infrastructure [was a] term that few were familiar with 15 or 20 years ago. And again, it’s something that we took the attitude that we’re going to build a leading team, we’re going to focus on generating a track record.”
But what about the move into private real estate? This seems somewhat counter to everything Cohen & Steers has done in the past. “We see the opportunity as the ability to position ourselves at the intersection of public and private and offer investment and asset allocation advice to clients looking at real estate, holistically, not simply public or private,” says Steers. “We don’t see anybody else doing that, having that capability or even trying. It’s a complex undertaking.”
Harvey adds: “Right now, we’re focused on creating these other capabilities to marry private with listed, and that’s going to create sources of organic growth for us in the future, which is what we’re all focused on.”