MAYNARD, Mass. - Digital Equipment Corp. is gradually selling all of its real estate investments on the premise that stocks and bonds will outperform property over the long term.
The company's position is counter to the prevailing outlook for real estate investing among most pension funds. Many pension funds have increased or begun to fund their commitments to real estate based on the outlook, at the beginning of 1995, that real estate would outperform marketable securities.
That has not been the case this year, although Digital's decision to get out of real estate was made in 1993, before this year's rally of the stock and bond markets.
Digital has about $51 million invested in real estate - about 3% of total assets. The fund's allocation to real estate was about 8% of total assets when it began to decrease its investment to property in 1993.
The company does not discuss its asset mix, but the money coming from selling the real estate will go into equities, said A. Raymond Schmalz, director of benefits finance and investments for Digital's $1.7 billion pension fund.
All of Digital's real estate investments were made for it by real estate adviser Aldrich Eastman & Waltch, Boston.
"It's a diversified portfolio of retail, industrial and offices, primarily through pools," said Mr. Schmalz. Digital also bought some individual properties, he said.
The performance of AEW's funds had little to do with the decision to sell real estate, said Mr. Schmalz, who declined to discuss the firm's performance. "We were focused on where we thought it might go," he said.
According to Investment Management 1995, a report issued by investment consultant Greenwich Associates, pension funds and endowments and foundations are expected to increase their allocations to equity real estate.
Pension funds' allocations to equity real estate are expected to increase to 4.1% of total assets in 1997, up from 3.2% in 1994. Corporate funds, however, are less likely to be part of the trend: equity real estate as a percentage of total assets from 1994 through 1997 is expected to stay level at 2.6%, the report concluded.
"We looked at this carefully, and we asked ourselves what kind of real returns could we expect real estate to have over the long term," Mr. Schmalz said.
"We understand that some plan sponsors are more aggressive and look for unique opportunities," said Mr. Schmalz, acknowledging his fund's contrarian position. "We don't invest our money that way.
"We try to project what the real return from asset classes will be. Our expectation for real estate, net of all fees and costs, and reflective of increases in rents, is 1% over the next 10 to 20 years."
Real estate returns are driven by a landlord's ability to raise rents, said Mr. Schmalz. "As rents rise, two things develop: people will build more space or they will find more efficient ways to use space," he said.
Both strategies keep rents from growing. Rents will tumble if overbuilding is the result.
"If we are wrong, what have we forgone: 5% to 10%?" said Mr. Schmalz. "How much did we leave on the table?
"This (Digital's strategy) assumes that stocks and bonds do what they have done in the past," said Mr. Schmalz. "It is certainly not imprudent."
There is no deadline for the withdrawal, said Mr. Schmalz. AEW has been told to sell when opportunities arise, he said.
"A few properties will be marketed," he said. "This is not a fire sale. We are not going to pay a penalty to get out."
Digital's position on real estate does not preclude the fund from investing in publicly traded real estate investment trusts, but no manager will be hired to invest specifically in public property companies.
"We will be in REITs when our (equity) investment managers say we should be," said Mr. Schmalz.