Three Decades of Institutional Real Estate Investment
In a new working paper, we study almost 30 years of real estate investments by pension funds, using the renowned CEM database. Beyond great stats on real estate allocation, cost and performance over time and across different regions, one of the highlights of the study is the insight into the growth of different investment vehicles – think co-investments, limited partnerships, and fund-of-funds.
For private equity real estate investments, we find that the dominant strategies in the 1990s were “internal active” and “external active” (mostly open-ended funds, such as the ODCE funds in the U.S.), with a very small minority of investors using limited partnerships. After 2000, the “limited partnership” category (mostly closed-end funds, such as those raised by Blackstone etc.) gained in popularity, with about 30% of private real estate investments flowing through that structure in 2018.
On the internal side, operating subsidiaries and co-investments were not used in the 1990s, but made some gains in recent decades, and are now almost exclusively used by the biggest pension funds. For example, many Canadian pension funds have wholly-owned real estate subsidiaries (e.g. Oxford Properties of OMERS). Fund-of-funds, the most intermediated and most expensive way to get exposure to private real estate, gained ground until 2014, but decreased in popularity since that time, and now represent approximately 10% of private real estate investments.
Graph 1: Real Estate Investment Vehicles -- Private Real Estate
Investment practices for public real estate (i.e. REITs) have also changed quite dramatically over the last 30 years. During the early years of the sample period, all investment in public real estate securities was active and internal. In the mid-1990s, that shifted to external parties, who still managed the portfolios actively. In total, the “external active” category is responsible for about 60%-70% of the listed real estate exposure of global pension funds throughout the last two decades. Passive investment, both internally and through external fund managers, started gaining ground from the late 1990s, but contrasting the trend in general equities, the growth in allocation to passive products (e.g. ETFs) has been rather slow.
Graph 2: Real Estate Investment Vehicles – Public Real Estate
Combined with the fact that investment in private real estate is strictly “active,” we conclude that real estate very much remains an actively managed asset class. The paper shows what that means for costs and, of course, for returns.