U.S. pension funds have lowest real estate returns

U.S. pension funds have had the lowest real estate returns in the global pensions industry because they rely on costly external managers and made risky bets before the financial crisis, according to a study by Maastricht University.

Property investments generated an average net annual return of 5.7% for U.S. pension funds from 1990 through 2009, according to research by the Maastricht, Netherlands-based university. That compares with 7.2% for Canadian funds and a typical return of more than 7% for other funds.

The average cost of managing U.S. pension funds’ real estate investments is 64% higher than for Canadian funds, which have the second-highest costs, the study showed.

Just 7.6% of U.S. funds’ real estate assets are managed internally, according to the study.

“U.S. pension funds are reluctant to make in-house choices, and one of the main reasons for this is their concern about potential litigation,” said Nils Kok, a co-author of the study, in an interview. Mr. Kok presented the report at the European Public Real Estate Association’s annual conference.

“Many of the pension plans are underfunded, and when these funds see an opportunity to juice up their returns, they go for it,” Mr. Kok said. “From 2004, a large number of these sophisticated investors made foolish investment choices that were no different from the exuberance of retail investors.”

The study surveyed 884 pension funds with more than $4.6 trillion of total assets.