The Advantages of Investing in Pension Funds in Real Estate

The influx of investment managers and investors focusing on real estate investments has created many types of investment vehicles and strategies. Advantages of this market include added portfolio diversification, an enhanced risk-to-return ratio, uncorrelated returns and a vast number of opportunities. Like managing any other section of a pension's portfolio, research and consistent monitoring of investments are the key to a successful real estate allocation.

Portfolio Optimization and Diversification

Real estate investments are made across a plethora of asset classes and investment strategies. This allows pension fund trustees to choose strategies to diversify the real estate and total sections of their portfolio. For example, a February 2011 study conducted by the National Association of Real Estate Investment Trusts found that an optimal real estate portfolio came from a two-thirds private real estate and one-third real estate investment trusts. Through their independent and uncorrelated performance streams through an economic cycle, trustees gain additional flexibility to maximize returns for the total portfolio in a long-term investment.

Uncorrelated Returns

Real estate investments generally have a low correlation, which is a measure of a statistical relationship between two variables, to the stock market. On average, for longer holdings periods of two years, real estate investment trusts and private investments have shown to have about a 40 percent correlation to the stock market and, as a result, enhance the Sharpe Ratio when added to a portfolio. Because of the various strategies and asset classes, trustees can time the market to target special opportunities.

Global Diversification

Given the sophistication of global real estate investment managers since the emerging market's boom of the early 21st century, trustees now have almost unfettered access to developed and developing countries. Real estate access to such growth countries as China, Brazil, and Singapore allow the trustee to manage risk and provide favorable returns. Trustees may also select from country or region-specific real estate funds that take advantage of isolated growth trends.

Investment Opportunities Ahead

Vehicle structures of real estate investments give investors the tools to take advantage of market movements. The nature of a private equity fund, for example, includes a holding period ranging from five to 10 years. As trends come and go, investors can shift money to specialized investment strategies with favorable risk-to-reward scenarios. Any new invention, trend or discovery sparks the development of new real estate funds seeking to take advantage of the trend.

References

• PR Web: NAREIT Study Highlights Need for Pension Funds to Reassess Real Estate Strategies
• Institutional Investor: Public, Private Real Estate Split the Best Shot at Lowering Risk
• Bloomberg: REITs Seek to Lure U.S. Pension-Fund Money From Private Equity
• Towers Watson: Pension Funds Allocate Across The Breadth of Alternative Assets
• "Pension Fund Investment in Infrastructure"; Georg Inderst; January 2009

Resources

• Institutional Real Estate, Inc: Market-related FAQs
• United States Department of Labor: The Employee Retirement Income Security Act