Pension funds continue the trudge back to real estate investing they abandoned during the early 1990s, with total tax-exempt assets under management finally surpassing the peak of 1990.
The 50 largest real estate managers for pension funds and other tax-exempt institutions reported a net increase in tax-exempt assets under management of 1.4% for the one-year period ended June 30, rising to $131.7 billion from $120.4 billion a year ago.
For the same period, the NCREIF Property Index posted a gain of 7.9%. These properties earned income of 9.3%, but they dropped in value by 1.3%.
Overall, the total amount of tax-exempt money invested in real estate - as measured by all real estate managers - surpassed 1990's record of $129.4 billion reaching $136.8 billion.
Mergers bring in assets
Big gains in new tax-exempt assets under management were had primarily by large and midsized firms.
The biggest dollar increases reported by real estate managers were the result of mergers.
Heitman/JMB Advisory Corp., Chicago, increased assets under management 83%, rising to more than $12.1 billion from $6.6 billion.
LaSalle Advisors Ltd., Chicago, increased total tax-exempt assets 97% and now totals more than $8.9 billion. (The figures for LaSalle on the table on page 22 are incorrect; the numbers were changed after the table was printed.)
The largest portion of Heitman/JMB's increase came from $4.2 billion that JMB managed for tax-exempt investors.
The bulk of LaSalle's growth came from its acquisition of Alex. Brown Kleinwort Benson, which added $3.6 billion.
But some other large institutions managed to increase tax-exempt assets as a result of new business.
For the year ended June 30, New York-based J.P. Morgan Investment Management's assets increased 47%, rising to $7.9 billion from $5.4 billion; AMB Institutional Realty Advisors, San Francisco, increased its tax-exempt assets under management by 69% to $2.2 billion from $1.3 billion during the period.
AMB Chairman T. Robert Burke attributed the firm's rise in assets to an unusually high number of property purchases and takeovers of existing portfolios from other institutional investors.
"In 1994, we acquired $525 million in assets, almost two times our normal rate and more than we anticipate doing this year," said Mr. Burke.
"This year, we are on a pace to do $400 million to $450 million."
Midsized firms report gains
AMB also took over the management of a $225 million property portfolio from Allmerica Financial Inc., a Worcester, Mass., insurance company.
Mr. Burke estimates AMB won an additional $175 million of existing portfolio business.
Sarofim's tax-exempt assets under management rose 44% to $765 million from $528 million. Cabot's assets increased 25% to $831 million; and American's rose 22% to $710 million.
Cabot's growth came primarily from new separate account clients and an increase in business for existing clients, said John F. Malloy, director of marketing. The company invests in industrial properties.
New clients included the $60.6 billion New York State and Local Retirement Systems, Albany, and the $4.6 billion Police & Firemen's Disability & Pension Fund of Ohio, Columbus.
"We are seeing a desire for core investments in warehouse/distribution properties," said Mr. Malloy.
The largest gain in tax-exempt assets was reported by Standard Life Assurance Co. The Montreal-based company reported a 114% increase in tax-exempt assets under management. The firm had $184 million under management on June 30, compared with $86 million a year ago.
The Yarmouth Group, New York, saw its tax-exempt assets decline 18% to $4.2 billion from $5.1 billion. Edward Meyer, a Yarmouth spokesman, said several of the firm's clients are invested in programs that are now in liquidation.
Much of it is business the firm took over from other troubled managers, and Yarmouth was hired to execute a disposition strategy, Mr. Meyer said.
The firm did lose one client, noted Mr. Meyer. He declined to identify the client.
The largest decline in tax-exempt assets under management was posted by American Agricultural Investment Management. The firm lost 94% of its assets dropping to $1.2 million from $20 million.
Bill Naffziger, a company spokesman, said a single pension fund client changed its asset allocation, which resulted in American Agricultural's termination. He declined to identify the pension fund.
Trend reversal seen in '94
Performance in 1994 was good, and Mr. Naffziger forecasted stable appreciation and income for 1995.
The downward trend of pension fund investment in real estate began its reversal last year when managers reported total tax-exempt assets under management of $123.2 billion, up from $115.7 billion as of June 30, 1993.
This year's increase reflects a return of pension funds to the market to fulfill their real estate allocations, not to increase allocations, said Micolyn Yalonis, real estate consultant with Callan Associates, San Francisco.
"The market has stabilized and the capital has returned," Ms. Yalonis said. "It seems to be across the board."
Investment in equity real estate increased overall to $105.9 billion, compared with $97 billion in the same period a year ago; publicly traded REITs increased to $5 billion up from $4 billion in the same period; commercial mortgages jumped to $19.5 billion from $14.8 billion.
Hybrid mortgages declined to $6.3 billion from $7.4 billion for the one-year period. Debt and equity securitized real estate commanded a bigger slice of the tax-exempt investment pie for the year. Lumped under the heading of "other," the securities rose to 10% up from 5% a year ago.
Pensions & Investments began measuring tax-exempt investment in public REITs 1994 as a result of an increased interest in the securities in 1992 and 1993. But pension fund interest seems to have waned.
"It hasn't grown as much as I thought it would," said Ms. Yalonis. "They are waiting to see what will happen with the market."
After posting large gains in calendar year 1992 and 1993, REITs fell back to earth with a 3.1% return for the year ended Dec. 31, 1994. That return was better than the NCREIF Property Index's 1.2% return, but pension funds in particular have long invested in private real estate and feel more comfortable with it.
REIT streak cools
Interest rates rose in 1994, sending the interest-sensitive REITs tumbling.
Initial public offerings that flooded the market in 1992 and 1993 were curtailed by investors' lukewarm reception to what were considered mediocre companies.
"The rush to get in cooled considerably with the changes in the opportunity," said Ms. Yalonis, explaining why pension money to REITs has slowed.
"Institutional investors attempt not to time the market, but the reality is that their focus tends to be on the issue that is most urgent," said Ms. Yalonis. "A hot REIT market got everyone's attention. When it cooled off they focused on other things."
Those other things were private real estate investments through direct investment or commingled funds. As the REIT market cooled, private real estate stabilized; the market loosened up and transactions started occurring, said Ms. Yalonis.
The eastern United States attracted the most attention: 27% of tax-exempt assets were invested there, up from 24% a year ago. The Midwest increased to 19% from 18.2% a year ago.
The South declined slightly to 24% from 24.6%, while the West continued its slide, dropping to 30% of tax-exempt assets. Last year 33.2% of tax-exempt assets were invested in the West; in 1993, it was 37.4%.
The information contained in the profiles, charts and tables in this special report was obtained from questionnaires sent to the real estate investment management firms and from follow-up calls.