IPE Real Assets’ top 100 ranking of some of the world’s largest real estate investors has captured more than $1.34trn (€1.20trn) in real estate assets held by pension funds, sovereign wealth funds and other institutional capital owners.
It was based on IPE Research survey data and publicly available information, predominantly in the form of annual reports. Where accurate numbers were not available, estimates have been made. Some investors have not been included owing to a lack of information.
We also take the opportunity to survey institutional investors on real estate allocation trends, strategies and views on the market. One of the most notable findings this year is that investors are getting increasingly closer to their target allocations. Average target allocations (12.5%) have risen slightly (10bps) from last year, but actual allocations (11.5%) have risen further (40bps).
This means the gap between long-term allocations and investors’ exposure is closing. The finding is consistent with recent investor surveys by real estate associations INREV, ANREV and PREA.
This could have implications for the level of activity in real estate markets. As more investors become fully invested, will the situation lead to less investment in the asset class?
Interviews with investors suggests not. Many of the world’s largest institutions have positive inflows requiring them to continue to make new investments just to maintain their current allocation levels. This is supported by the finding that 53% of investors expect to be net buyers this year, and a further 32% being neither net buyers nor net sellers.
APG, which manages investments on behalf of Dutch pension funds, including the largest ABP, falls into this camp. “Our clients’ real estate exposures are currently within their targeted weightings,” says Rutger van der Lubbe, head of global real estate investment strategy at APG. “As such there is no necessity to either actively increase or reduce real estate exposure, leaving us in a position to act as we see fit.”
Asked whether he expects APG’s level of investment activity to change this year compared with 2018, he says: “We’ve been fairly active in making new investments but actually even more so in follow-on commitments. Our annual activity in terms of reinvestment of income and capital proceeds is typically already in the order of €2bn annually, a pace hence we’ll likely continue.”
The story is similar at APG’s nearest rival, PGGM, which manages the investments of Dutch pension funds, including the country’s second-largest, PFZW. “PGGM will maintain its exposure for 2019,” says Guido Verhoef, head of private real estate. “Our clients are fully invested and we find the prices pretty full.”
He adds: “PGGM has been and will be pretty active in 2019. We have bought and sold as part of our portfolio strategy. Being a large global investor, we will always be able to find opportunities.”
However, some investors are experiencing a slowdown as they become fully invested. Johan Temse, real estate investment manager at AP1, says the Swedish state pension fund is at its 13-14% target allocation and has been looking to maintain this level of exposure. AP1 has undertaken “limited activity on a selected basis” recently and he expects this continue.
Germany’s largest pension fund Bayerische Versorgungskammer (BVK) is expected to continue to be active this year, as its allocation climbs beyond the 20% mark (German regulations place a 25% limit).
“We will continue to increase our allocation to real estate today through direct and indirect investments,” says Rainer Komenda, head of real estate funds at BVK. “While we are today at approximately 21%, we’re still having room to grow, also due to our net-positive income versus pay-out ratio…. We are convinced real estate is a backbone to our multi-asset investment approach. This is due to relatively stable income streams, low correlations to other asset classes and other diversification benefits.”
He adds: “We expect to be part of the active investors in 2019, whilst investing a little bit slower and continuing to be very selective. Net-net we will be increasing, but it could be with fewer but bigger deals.”
Mikko Antila, head of international real estate at Ilmarinen, says the Finnish pensions insurance company will be either a “net buyer or net neutral”, although it is looking to increase its international investments and real estate debt activity.
“We’ve been very active through 2015 to 2018, but are looking at a slightly less active year for real estate equity in 2019,” he says. “We anticipate to be quite active in real estate debt, however, which should leave us net neutral for 2019 in terms of new investments.”
Antila also says that core real estate “has become too pricey in most of our target markets” and that Ilmarinen is “selectively looking at some value-add opportunities”.
This year, value-add took over from core as the most attractive investment strategy in the current market environment. As we highlight on pages 50-51, value-add strategies have become appealing to many investors late in the cycle.
More than 90% of BVK’s real estate portfolio is made up of core and core-plus investments. BVK’s Komenda says the pension fund has “started to also look into value creation themes”. He says: “We don’t shy away from developments, forward fundings or purchases – as long as the risks are mitigated, best-in-class partners are involved and planning is in place. With our proprietary fund-of-funds we are covering the value-add/opportunistic side through global commingled funds. Also, we are reviewing the feasibility of doing more in the value creation space.”
Allianz Real Estate, which manages the real estate investments of Allianz insurance companies, is also looking to the value-add end of the market, having historically been focused on core.
|Investor||Country||Real Estate Assets ($’000s)||Total Assets ($’000s)|
|1||Allianz Real Estate||Germany||72,400,000||767,200,000|
|2||China Investment Corporation||China||52,853,843||941,417,000|
|9||Canada Pension Plan Investment Board||Canada||33,904,400||269,734,000|
|15||Government Pension Fund Global||Norway||28,182,700||945,839,000|
|18||National Pension Service||South Korea||25,016,000||563,945,000|
|20||Ontario Teachers’ Pension Plan||Canada||20,313,100||147,688,000|
|22||Teacher Retirement System of Texas||US||18,300,000||153,100,000|
|23||Washington State Investment Board||US||18,134,465||128,200,000|
|25||The Crown Estate||UK||17,900,000||17,900,000|
|26||British Columbia Investment Corp/Quadreal||Canada||16,367,800||112,946,000|
|28||MEAG Munich ERGO||Germany||16,013,100||290,523,000|
|31||Florida State Board of Administration||US||14,340,904||160,438,425|
|33||Standard Life Aberdeen||UK||13,152,600||267,276,000|
|34||Zurich Insurance Group||Switzerland||12,126,000||411,058,000|
|41||Hong Kong Monetary Authority||Hong Kong||10,031,100||513,748,000|
|45||Legal & General||UK||8,838,760||624,559,000|
|50||Virginia Retirement System||US||7,600,000||75,800,000|
|51||Illinois Teachers Retirement System||US||7,400,000||49,900,000|
|52||State of Wisconsin Investment Board||US||7,400,000||93,500,000|
|56||New Jersey Division of Investment||US||7,100,000||77,100,000|
|58||Samsung Life||South Korea||6,509,580||260,200,000|
|67||Employees Provident Fund||Malaysia||5,716,580||200,273,000|
|68||Alaska Permanent Fund Corporation||US||5,451,700||61,844,700|
|82||Arizona State Retirement System||US||4,315,988||40,790,526|
|84||First State Super||Australia||4,008,340||52,882,000|
|88||New York Teachers Retirement System||US||3,868,000||71,477,000|
|92||Ontario Pension Board||Canada||3,707,340||21,068,900|
|93||Ärzteversorgung Westfalen Lippe||Germany||3,490,390||15,867,100|
|94||New York City ERS||US||3,476,000||63,845,000|
|96||Royal Bank of Scotland Group||UK||3,402,760||61,867,500|
Overall, return expectations continue to fall and are hovering around the 6.5% mark. Last year, investors on average expected a 7% return and, according to this year’s survey, came close with 6.6%.
Allianz Real Estate outperformed this average, generating a 10% return. But the group expects lower returns this year, between 4% and 6%.
Antila says: “Real estate equity is more keenly priced and total return expectations are quite a bit lower than for previous years. But on relative terms we still see value in real estate.”
Van der Lubbe says APG’s “required returns are very much vehicle-specific and dependent on a wide variety of factors”. He adds: “As such, we don’t quantify overall return targets, but will suffice to say that both required and expected returns have somewhat decreased as a result of the interest rate environment we operate in.”