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Benefits and Pensions MonitorReal Estate Essential In Investment BlendBy: Ted Welter Earning competitive returns while protecting capital is the primary objective of institutional investment funds everywhere. Carefully designed and managed funds pursue this objective by blending asset types and geographic regions. The right blend is critical to the health of the fund and the welfare of its beneficiaries. Increasingly, large and small investors are turning to commercial real estate as an essential element in their investment blend. They realize that real estate plays more than one role in a balanced investment program. Itʼs reliable, offers high current income, diversification, and long-term returns that are competitive with other asset classes. Equally important, new investment vehicles and disciplined investment processes make real estate more accessible to institutional investors, and with improved liquidity. Strong And Sustainable Current Income Real estate provides strong and reliable income over the years. Thatʼs a big advantage for asset liability matching and to meet continuing cash flow needs. Current income is not only historically the largest portion of total real estate returns, but also the most stable, varying little from year to year. Over the past five years, income has consistently represented about eight per cent of the total returns from real estate. In recent years, capital appreciation made real estateʼs returns even more competitive with other asset classes, yet income is fundamental to overall performance. Improved Portfolio Diversification Investment managers diversify both to boost returns and curb risk. They study how one asset class performs compared to others over the course of an economic cycle. Does the return on one class increase as others decrease, or do they move in lockstep? The lower the correlation, the greater the diversification benefits which lowers the portfolioʼs risk. A comparison of 30 years of correlation data shows that real estate does not move in tandem with either stocks or bonds, which means it lowers your portfolioʼs overall risk. Also, real estate is somewhat positively correlated with inflation, offering a partial hedge against inflation.
Time For Re-evaluation Traditionally real estate assets were considered to carry with them considerable drawbacks relating to immobility, durability, low turnover, high capital costs, and long production cycles. Many of these characteristics are also evident in other classes. However, the combination, when added to the commonly held belief that real estate management is more involved and requires more expertise than management of other classes of assets, puts real estate at a disadvantage to other asset classes. It is now time to re-examine these longheld misconceptions, to fully understand the array of products now available to deal with these perceived drawbacks, and to reconsider what the appropriate role for real estate is in any institutional portfolio. The evolution of real estate products over time has allowed real estate to become a much more important tool for diversification, asset-liability matching, and income provision within an institutional plan. The time is right to reconsider your asset mix and the role of real estate in your portfolio. Vehicles For Investment Commercial real estate is a sizable part of the total investment universe – more than $100 billion in Canada, according to some estimates. Now that we have demonstrated some of the benefits of participating in the opportunity to invest in real estate, the question of how to invest remains. Once thought of as an asset class for large pension plans looking to enhance performance and control risk by employing in-house investment teams, the market now offers all investors the opportunity to invest in real estate through a number of vehicles. Some of the more common options include direct investments, indirect investments, pooled funds, publicly traded funds, public real estate corporation stocks, and REITs. The growth of the REIT sector and common real estate stock allow investors an indirect investment in real estate that can offer a higher dividend or payout than common stock, but provides similar attributes and correlation to publicly traded securities with greater liquidity. For investors to achieve the core investment characteristics of this asset class, direct investment in real estate is required. This can be achieved through segregated and/or pooled investments offered by qualified investment management firms. Investors can participate in products with established philosophies and processes providing long-term value. The options are varied, but finding the right one for your fund can enhance returns and reduce risk. Ted Welter is senior vice-president, real estate, at Greystone Managed Investments Inc. |
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