A number of US institutional investors are re-evaluating their real estate portfolios and strategies, with some finding they have become over-allocated to the asset class and others anticipating a ‘buying opportunity’, according to advisers.
“Right now we are all trying to figure out [the] short and long-term consequences for the real estate industry,” said Allison Yager, global leader for real estate at investment consultancy Mercer. “One thing we can assume is that last week’s value assumptions are no longer valid”.
Yager said different real estate markets and sectors would be affected to varying degrees, but “the values will all need to be readdressed” and a “greater risk premium” applied to “most assets at this point”.
Steep falls in stock markets will have automatically pushed up investors’ weightings to non-listed markets like private real estate.
“With the losses we’ve seen in equity markets and the fact that most investors… were at their target allocation for real estate – and most likely any other alternatives – we are going to see some issues regarding over-allocations,” Yager said.
According to the most recent annual Institutional Real Estate Allocations Monitor, produced by Cornell University’s Baker Program in Real Estate and Hodes Weill & Associates, US public pension funds have lower target allocations to real estate (on average 9.9%) compared with their global peers, but they are also closer to their target allocations.
Douglas Weill, co-founder and co-managing partner of Hodes Weill, said pension funds had remained under-allocated to real estate in recent years “as equity markets continued to climb”. But, as of this week “many institutions are telling us that they’re at or over-allocated to real estate”, he said.
But investors are unlikely to sell real estate assets to correct their weightings. “We have not seen institutions proactively liquidate positions to get back to target allocation,” Weill said. “In all likelihood they will remain very patient, as they did during the global financial crisis.”
Weill said investors were more likely to “let their portfolios burn off” by not making additional capital commitments to the asset class.
For commitments made recently or at an advanced stage of due diligence and legal review, “for the most part we are seeing investors continue their processes and in fact closing on some commitments”, he said.
“We’ve heard from a few institutions that they are going to be pausing on anything new until they really understand what’s going on in the market and the implications.”
But some investors are open to taking advantage of the uncertainty and disruption. “We have heard from a handful of institutions that this may be a good time to be thinking of deploying capital,” Weill said.
“The next several years could be good vintages. So investing in blind-pool vehicles that tend to deploy over the next couple of years may make sense over the coming months. But that is handful… for the most part institutions have hit the pause button.”
Others are viewing listed real estate investment trusts (REITs), which have fallen in value with the rest of the equity markets, as a “buying opportunity”.
“You may see some institutions that have been less active in REITs securities become more active,” Weill said.
“Several institutions have now included listed real estate securities within their real estate allocation, and the theory being there are moments in time to buy REITs, when they are trading below NAV.”
He added: “If the public equities are resetting or devaluing more than the underlying intrinsic value, there could be great opportunity to deploy capital.”
Yager said that Mercer had been “preparing our clients for a downturn” and that as well as “issues that investors will have to deal with” there will be opportunities.
“We have already been talking with investment managers and our clients in regards to what some of those opportunities may potentially be,” she said.
