A Global Perspective on Pension Fund Investments in Real Estate

Studies of real estate performance usu- ally analyze property indexes, inves- tigate individual buildings, or address listed property companies (REITs).

Outcomes of such studies can help explain the risk–return profile and diversification benefit of real estate, but for a typical institutional investor, those aspects are just part of the equa- tion when allocating capital to real estate. To gain exposure to real estate, there are often multiple layers of investment management and costs between the investor and the assets, and thus the true performance of real estate invest- ments at the level of the institutional investor may be different from what empirical studies on the performance of real estate suggest.

Using the CEM global database on pension fund investment—the largest data- base on pension fund investments, covering almost 900 pension funds over a period of 20 years—enables us to investigate real estate investments through the lens of the institu- tional investor. The database provides rich information regarding the choices that pen- sion funds all over the world make in their real estate investments, both strategically and in terms of practical implementation. Moreover, the database allows us to show the implications of these choices for both investment costs and performance. The contribution of our study is to provide deep insights into real estate’s con- tribution to pension fund performance, taking into account the costs of investment choices.

Most importantly, we are able to compare different investment styles and approaches to and study what these deliver for the bottom line of pension funds. Our study shows that large pension funds have significantly lower costs and higher benchmark-adjusted perfor- mance than small funds and that US pension funds have higher costs and disproportionally lower performance than their global peers. Our results also suggest that external manage- ment of real estate investments is expensive and generally does not add value in terms of performance.