How Far Up Risk Ladder
Will Institutions Climb?
Leave it to the Dutch. Denmark’s Unipension, which runs three
national pension plans with assets of around $15 billion, is completely retooling its real estate investment strategy. The plan is to
sell off all of its Dutch-based property assets by the end of 2013
and instead focus on indirect investments in Europe and—wait
for it—the US.
Here in the States we obviously applaud such a move, but the
shifting strategy speaks to a larger trend among major institutional investors across the globe. When it comes to commercial
property, they are no longer content with the status quo. While
the game today is still based on diversification, there is a marked
movement up the risk ladder to achieve higher targeted returns.
At Denmark’s Unipension, the plan’s real estate investments
returned a meager 2.3% to 4.7% over the past three years, and
given its turn in strategy, it is hoping to achieve something on the
order of at least 5% on its real estate
assets. In US terms, that’s a pretty low
threshold, since targeted total returns by
many of the larger plan sponsors are more on the order of 7.5%
One much-watched bellwether is the upper leagues among the
private-equity players. In recent months, TPG Capital, Kohlberg
Kravis Roberts and the Blackstone Group have been busy introducing value-added funds. As a group, a recent study by London-based Preqin noted the growing appetite for higher risk among
private real estate investors, with 55% of those surveyed targeting
value-added funds in 2013 compared to 47% in 2012. When it
comes to fundraising, the number of value-added funds in the
market has increased over the past year, from 95 in February 2012
to 107 in February 2013.
So does that mean core is, well, not so “core” anymore? Far
from it, as the Great Recession taught many a fund manager and
plan sponsor some hard lessons. In a bit of good news for the
core players, US core open-ended funds significantly outperformed their European and Asian counterparts over both one
and three-year periods, according to a new global property fund
index by IPD.
But memories tend to become shorter as time passes, and it is
especially hard to ignore the fact that pricing on traditional core
assets in major gateway markets has jumped to pre-recessionary
levels in many cases. Billion-dollar-deals are commonplace in the
Manhattan office market, for example, and that is rich territory
for all but the largest of the institutional players. The trend looks
set to continue though, thanks to the continuing demand from
the sovereign wealth funds in particular.
The signposts are pointing more investors down a slightly
riskier road, and the overall marketplace is starting to look very
much pre-2008 when it comes to the appetite for opportunistic
investing. Preqin’s survey notes that investors in core funds have
By Ben Johnson
dropped, from 54% of investors in private real estate targeting
the strategy in the 12 months following January 2011, to 45% in
the 12 months following January 2013. At the same time, 36 value-added funds held a final close with an aggregate of $11 billion in
2012, a big jump over the 27 funds that raised $8 billion in 2011.
Still, the funds are only able to raise money at the pace that institutions want to invest. Thankfully this time around, the fundraising cycle is still pretty lengthy and institutions seem to be
more selective and disciplined in their capital outlays, so any
feeding frenzy has been abated.
Certainly there are ample opportunistic plays surfacing.
Ivanhoe Cambridge, the real estate arm of Caisse de dépôt et
placement du Québec, one of Canada’s leading institutional
fund managers, purchased 73 office buildings in Silicon Valley in
March, in partnership with TPG and Divco West. The group plans
to renovate the 6.4-million-square-foot office campus, which is
The signposts are pointing more
investors down a slightly riskier road,
and the overall marketplace is
starting to look very much pre-2008
when it comes to the appetite for
located in one of the country’s hottest office markets.
In another move, the $50-billion Pennsylvania Public School
Employees’ Retirement System is investing in two value-added real
estate funds targeting commercial properties in the US and industrial opportunities in Europe.
Even as these strategic shifts are occurring, the good news is that
much of the increased institutional risk-taking is not based on out-of-whack future assumptions, including factoring in accelerating
rental income when it comes to penciling out market-reality pro
formas. Most institutions are still toeing the line when it comes to
growth expectations, but don’t mind adding a bit of risk to their
portfolios to help juice returns. It’s just a question of balance. ◆
Ben Johnson is a contributing editor to REAL ESTATE FORUM and GlobeSt.com. He may be contacted at firstname.lastname@example.org. The views expressed here are the author’s own.