GLOBAL – The real estate asset class is moving through a critical phase as the world's largest investors strive to integrate it into new allocation models, a leading investment consultant told the IPD European conference on Thursday.
Speaking in Lisbon, Roger Urwin, global head of investment content at Towers Watson, said leading institutions were grappling with an asset class they favoured but was "still clunky and poorly integrated with the mainstream investment world".
The 50 largest pension funds and sovereign funds – dubbed by Urwin as the "Thrifty Fifty" – are desperately seeking alternative sources of return to meet their objectives, and although real estate is a target, there are concerns about transparency and costs, he said.
These investors face the challenge of convincing their investment boards of the rationale for increasing allocations to illiquid, less transparent alternatives such as real estate and infrastructure.
Urwin said the trend among large investors to increase their internal resources in these areas should be understood as a response to this challenge.
The difficulties of "private market integration" were prompting large investors to "take on similar characteristics" as asset management companies, he said.
But Urwin warned that the real estate asset class must "make its way through changing investment models" and governance structures if it hoped to continue to form a significant part of these large institutional portfolios.
He added that other investors would be watching how the Thrifty Fifty were approaching real estate investments going forward, citing as an example the California Public Employees' Retirement System (CalPERS), which has made its strategic decision-making public via its website.
Peter Hobbs, head of research at IPD, asked whether his organisation and the real estate industry should do more to simplify real estate as an asset class when talking to multi-asset investors.
Urwin responded that it was not necessarily important to simplify real estate but to continue "on the same track" of explaining the asset class in ever greater detail.