Endowments Go to School
On Real Estate Investment
When considering the institutional investor universe, endowments are not often top of mind. However, these education-based money managers are among the elite group of institutions that invest in commercial real estate, so their movements,
simply put, matter.
Did you know: The top 100 US endowments account for a total
of around $300 billion in total assets. According to researcher
Preqin, endowment plans had invested an average of 6.4% of
their total assets in real estate as of September 2011. So by simple
calculation, that represents a $19-billion investment source, not
shabby by any measure.
But endowments, like most institutional investors, have room
to grow in the real estate department. In terms of overall allocations, 45% of endowments have less than $20 million invested in
property, 24% have $20 million to $49 million invested and 26%
have real estate portfolios worth $50 million to $250 million. Only 5% of endowments have real estate portfolios worth
in excess of $250 million.
At the top of the endowment food chain is the venerable
Harvard Management Co., which was founded in 1974 and
today has a whopping $32 billion in total assets under management. For fiscal 2011, which ended June 30, 2011, HMC racked
up a total return of 21.4% and its real estate assets returned a
respectable 11%. But, like most other institutional investors,
that performance was not enough to offset major losses in
2008 and 2009.
As a group, endowments are struggling to achieve the heady
returns of just a few years ago. While pension funds and insurers
have their beneficiaries, endowments are all about supporting
the ongoing operation of their respective colleges and universities. With university spending rates increasing rapidly, jumping
4.6% in 2011 alone, endowments need annual returns of 8% to
10% just to keep pace with these increases, plus inflation. That
scenario kicks up the pressure on them to perform.
Thankfully, 2011 was a banner year for endowment growth.
According to the annual study from the National Association of
College and University Business Officers-Commonfund, US educational endowment assets grew 17.9% in the fiscal year ended
June 30 to $408.1 billion.
Yale University, which ranked second behind Harvard in the
study, with $19.4 billion in total assets, grew its asset base by 16.3%
in 2011. University of Texas System in Austin moved up to third
place from fourth with asset growth of 22% to $17.1 billion, just
ahead of Princeton University, which had $17.1 billion in assets,
and Stanford University, in fifth place with assets of $16.5 billion,
reflecting growth of 19.1%.
As an overall barometer for the group, HMC, under president
and CEO Jane Mendillo, is quite bullish on real estate. In 2009, it
By Ben Johnson
hired Daniel W. Cummings, a former managing director at private equity shop the Carlyle Group, as managing director of real
estate investments. That move has led to the development of a
number of joint ventures and investments in new pockets in the
global real estate market.
When it comes to investment strategy, endowments typically
favor the opportunistic and value-add sectors. Still, the need for
long-term, stable returns is very much at the core of most investing strategies, and endowments have shown an increasing appetite for net-leased properties, in particular.
For example, Harvard is a lead investor in a new $1-billion
venture that will buy triple-net-leased warehouses and distribu-
As a group, endowments are
struggling to achieve the heady
returns of just a few years ago.
tion centers, along with selected retail and office properties.
This strategic move underscores the hunger for yield at a time
when interest rates remain at historic lows. According to
sources, the fund is expected to yield 6.5% to 8%.
Smaller endowments are also on a growth trajectory and
ready to step up their real estate investments. Forbes recently
ranked the fastest-growing endowments from the NACUBO
study, and the University of Virginia topped the list with a 28.4%
increase in its assets from 2010 to 2011, followed by the University
of Pittsburgh, with a 24.3% jump, and Purdue University, which
In fact, the $5.4-billion UVIMCO more than doubled its real
estate allocation over the past four years. Real estate represented
just 2.7% of the total portfolio in 2007 but grew to 5.9% in 2011.
That still pales in comparison to the private and public equity
allocations of about 20% each in 2011. UVIMCO’s typical target is
to place 5% to 10% of its long-term pool in real estate.
Given these dynamics, as long-term investors, endowments
continue to find real estate a viable means to a much-needed end,
especially when it comes to adding portfolio diversification while
driving steady yields over long time horizons. ◆
Ben Johnson is a contributing editor to REAL ESTATE FORUM and GlobeSt.com. He may be contacted at email@example.com. The views expressed here are the author’s own.
APRIL 2012 REAL ESTATE FORUM 17