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Special Report

Real estate assets still growing, but at a slower pace

Worldwide figure climbs to $882 billion; U.S. institutional tax-exempt total rises 10%

102813 re mgrs illo

Updated with correction

Buoyed by rising property values, total worldwide assets of the largest institutional real estate money managers responding to Pensions & Investments' annual survey grew 9% to $882.2 billion in the year ended June 30, exhibiting slower growth than the 11.7% of last year's survey.

Managers' assets for U.S. institutional tax-exempt clients also grew 10% to $414.4 billion, of which the real estate equity assets grew 11% to $326.7 billion. Discretionary assets for U.S. institutional tax-exempt investors rose 7% to $340.4 billion during the period.

Among the 50 largest managers for U.S. institutional tax-exempt clients, assets rose 9% to $376.9 billion, of which the real estate equity assets increased 5.6%, to $286.1 billion.

Managers' mezzanine assets grew 48% to $4.57 billion; the top 10 mezzanine managers accounted for 94.5% of that total. Hybrid debt exhibited tremendous growth as well, up 48% also to $4.4 billion.

Real estate investment trust managers' total worldwide assets were up 22% to $360.8 billion, while REIT securities managed for U.S. institutional tax exempt clients increased 12% to $95.1 billion in the 12 months ended June 30.

During the survey period, the NCREIF Property index return was 10.73%. The FTSE NAREIT All REITs index, which includes both equity and mortgage REITs, was up 34.37%, while the FTSE NAREIT All Equity REITs index, which excludes mortgages, was up 33.81%, according to data provided by the Washington-based National Association of Real Estate Investment Trusts.

The top 10 real estate managers of U.S. institutional tax-exempt assets continued to gain market share, managing 52.4% of the total assets reported by all 96 managers in that universe. This is relatively flat from last year's survey results when 52.8% of the U.S. institutional tax-exempt real estate assets were managed by the 10 largest managers.

Not included in the rankings was the Blackstone Group, which did not complete the entire survey but provided some data for the first time this year. As of June 30, Blackstone Real Estate's assets under management worldwide — defined as equity value net of leverage and unused capital commitments — totaled $63.9 billion, with an estimated $21.3 billion managed for U.S. tax exempt investors.

During the survey period, asset valuations in certain locations such as the gateway cities like New York and San Francisco increased significantly, said Nancy Lashine, managing partner and co-founder of New York-based placement agent firm Park Madison Partners.

“Prices were going up; core was going up by a lot,” Ms. Lashine said.

There continued to be a lot of demand for core open-end funds, but in the first part of 2013, slightly riskier strategies gained more interest from institutional investors, she said.

Indeed, according to this year's survey results, the 10 largest managers of core real estate for U.S. institutional tax-exempt clients was up 16% to $157.4 billion, but assets at the riskier end of the scale were up somewhat more, with the top 10 managers of opportunistic strategies growing 26% to $18.3 billion and the largest value added managers up 19% to $39.5 billion.

Managers' investment for foreign clients in U.S. real estate is up 18% to $46.6 billion.

Foreign investors continue to view the U.S. as a destination of choice for their real estate investment dollars, said Peter Rogers, investment consultant at Towers Watson & Co. in New York.

Some of the larger foreign institutional investors such as sovereign wealth funds are large enough to find ways to minimize the tax burdens but smaller and midsize foreign investors are finding the tax burden “too daunting,” Mr. Rogers said.

The U.S. has been one of the most attractive markets, and over the past 12 to 18 months there was more focus from European and Asian, as well as U.S., investors looking to invest in the U.S., said Paul A. Vosper, chief operating officer and co-head in the London office of Morgan Stanley (MS) Alternative Investment Partners real estate group, which invests in non-core strategies.

Michael McMenomy, global head of investor services at CBRE Global Investors agreed: “The inbound capital (into the U.S.) from institutions outside of the states and in particular Germany and sovereigns out of Asia has been tremendous.”

“It's been frustrating for the U.S.-domiciled capital as those bidders are aggressive,” Mr. McMenomy said.

At the same time, international assets managed for U.S. clients were relatively flat at $32.8 billion.

The macro fallout with slower growth rates in India and China, a delay in deleveraging and attractive domestic opportunities kept U.S. capital at home, said Mr. Vosper.

Prudential on top

Once again this year, Prudential was in the top slot on P&I's rankings of the largest managers of institutional real estate both by worldwide and U.S. institutional tax-exempt assets. Prudential Financial's total worldwide assets grew 5% to $79.6 billion, while its assets for U.S. institutional tax-exempt investors were up 12.2% to $41.3 billion. (The figures represent both Prudential Real Estate Investors and Prudential Mortgage Capital Co.)

Prudential Financial's overall assets grew more slowly because during the survey period the real estate investment management firm's closed-end funds were selling properties, said Eric Adler, CEO of Prudential Real Estate Investors in his first interview since taking the firm's top job in August.

Much of Prudential's assets outside the U.S. are in closed-end funds that are in the later stages of their lifecycles, said Mr. Adler, who is based in London.

Those funds are in “sell-down mode” so net growth isn't as apparent, he said.

The U.S. is a different story. Prudential is a net buyer “marginally more buying than selling,” Mr. Adler said.

Last year, there was a lot of investment overall in mezzanine debt, the layer between the equity investment and the standard commercial mortgage.

“That theme has really taken flight,” Mr. Adler said.

“In Europe, we invested heavily in the (overall) debt space. It's a big theme and is set to continue for a while,” Mr. Adler said.

Prudential also was in the top position for managers of mezzanine debt ($1.7 billion) as well as mortgages ($15.4 billion). Prudential's debt business increased in part because of low interest rates and discussions earlier in the survey period around the U.S. federal government phasing out the quantitative easing that is keeping interest rates down.

“People thought interest rates were headed up, bells rang and investors had transactions they would like to put to bed,” said David Durning, CEO of Prudential Mortgage Capital Co., Chicago.

“It could have been our most active period of time ever,” Mr. Durning said.

Also bulking up the firm's debt assets was Prudential's pension risk transfers of corporate defined benefit plans, including those of Verizon Communications Inc. and General Motors Co. Prudential's asset mix for the pension funds in which it has taken over the pension liabilities includes investment in commercial mortgages, Mr. Durning said.

Another factor in the increases in debt assets at Prudential is that in March, regulators determined Fannie Mae and Freddie Mac, which offer much of the debt for multifamily properties, should reduce their investments in the sector by 10%. That brought a lot of attractive lending opportunities.

Much of Prudential's mortgage activity has been in multifamily property this year, Mr. Durning said.

Also on the top five list for U.S. institutional tax-exempt assets are TIAA-CREF, following Prudential with $40.26 billion, up 11.6%; J.P. Morgan Asset Management (JPM), $37.5 billion, up 15%; UBS Global Real Estate, $20.63 billion, a gain of 14%; and Clarion Partners, which saw its real estate assets managed for U.S. institutional tax-exempt clients rise 16% to $14.75 billion during the 12-month period.

New York-based TIAA-CREF has one open-end fund and much of its new capital has been through strategic relationships with institutional investors, said Philip McAndrews, managing director and head of global real estate transactions and joint ventures.

During the survey period, TIAA-CREF was a net buyer, Mr. McAndrews said: “We have not had a net sell year in a while. It was a very active year.”

Highest growth

Assets by property type and location

Fifth-ranked Clarion Partners had the highest growth among the top five managers of U.S. institutional tax-exempt assets.

Hugh Macdonnell, managing director and global head of client capital management in the New York headquarters of Clarion Partners, said about half of the increase was due to net capital raises and the other half was due to investment performance. Clarion's portfolio is 60% core and 40% non-core, with net capital inflows to the firm's open-end funds during the survey period. He declined to quantify those flows.

“We had more people investing than redeeming,” he said.

In the past 12 to 18 months, there was a huge influx of money into U.S. core strategies, said Nan Leake, partner in the New York office of the global private markets investment management firm Partners Group AG.

CBRE held onto the third position on P&I's list of largest institutional real estate managers by total worldwide assets, although those assets slipped 9% to $46 billion. Meanwhile, CBRE's assets managed for U.S. institutional tax-exempt clients dropped 11% to $7.2 billion.

In July 2012, CBRE closed the $350 million CBRE Strategic Partners U.S. Value VI fund, and in December it closed CB Richard Ellis Strategic Partners U.S. Value 6 LP, with equity commitments of nearly $1.1 billion; the capital is fully committed, he said. Those increases in capital commitments were offset by selling properties in its fifth fund, the $1.3 billion CB Richard Ellis Strategic Partners U.S. Value 5 LP, CBRE's 2008 vintage fund, he said.

The fund, which is invested in multifamily and office assets “did very well for our limited partners,” Mr. McMenomy said.

Although activity varied by region, LaSalle Investment Management globally was a net buyer during the 12-month period ended June 30, said Jon Zehner, managing director and global head of the client capital group in the London office of LaSalle Investment Management.

Overall, during the survey period, but especially in the first six months of this year, fundraising for LaSalle “became a little easier,” he said.

“We raised capital from all parts of the world to invest all across the world,” Mr. Zehner said.

LaSalle ranked second in P&I's list of managers of non-U.S.-based real estate assets managed worldwide. Its non-U.S. based assets managed worldwide grew 4% to $21.3 billion during the period.

“I would tell you up and through the end of last year and maybe into the first quarter of 2013, U.S. institutional investors were very much focused on the U.S. and as they thought about Europe they were scared by Europe,” Mr. Zehner said.

However, that feeling lifted in the beginning of this year.

“We raised a lot of opportunistic capital for Asia and for European mezzanine debt, which I would consider in the value-add category,” he said.

This article originally appeared in the October 28, 2013 print issue as, "Assets still growing, but at a slower pace".