Real estate advisers that specialize in managing portfolios of public real estate investment trust securities were big gainers of pension fund assets for the year ended June 30, according to Pensions & Investments' survey of real estate managers.
Tax-exempt assets under management in that sector increased 38% for the year ended June 30, rising to $7 billion from $5 billion. Adjusting for the 16.5% rise in the 169-company National Association of Real Estate Investment Trust Equity Index, more than $1.1 billion of new money was allocated to REITs by pension funds and foundations.
Overall, private equity real estate remains the manner in which most pension funds invest in property. The total for the one-year period was $99.6 billion, compared with last year's $105.7 billion.
That decline probably reflects P&I's insistence this year that everyone submit numbers net of leverage. Several advisers whose numbers declined from last year's survey said it was due to the inclusion of leverage last year.
Also, some managers said they took advantage of strengthening property markets and sold some properties.
New York-based O'Connor Group's total assets - taxable and tax-exempt - would have increased to $7.5 billion this year from $7.2 billion last year if the rules hadn't changed, said Julie A. Brenton, vice president.
A spokesman with Copley Real Estate Advisors, Boston, also attributed the firm's reported decline in tax-exempt assets (to $1.918 billion from $4.289 billion) to the change in reporting as well as the sale of some assets.
Copley's net tax-exempt assets last June 30 stood at $1.8 billion, said Laurence Dwyer, a spokesman.
Victor MacFarlane, chief executive officer of G.E. Capital Investment Advisors Inc., said his firm has been selling properties because it has been a good time to sell. G.E. Capital's tax-exempt assets under management declined 37% to $1.3 billion from $2 billion the year before.
"We are in the process of selling a lot of assets this year," said Mr. MacFarlane. "We disposed of a lot of assets in advance of our acquisitions process.
"We had one new investment program that we haven't really kicked off this year. That accounted for $100 million," said Mr. MacFarlane.
"If you had taken us at the end of the year, we would be up. At June 30 we were down a little bit."
No accounting change, however, would have diminished the ascendancy of REITs as an investment sector.
Mark Decker, chairman of the National Association of Real Estate Investment Trusts, said the gain in popularity of REITs among pension funds is recognition that this industry is a smart place to invest.
"That doesn't surprise me," said Mr. Decker. "I think that the (REIT) industry is maturing and being recognized as a very stable, solid way to invest in commercial real estate.
"At the end of the day, pension funds want performance from all their investments, and I think our industry - historically, now and in the future - is going to give them the best performance for every dollar invested in real estate.
"It goes back to the idea that a dollar invested by a focused management company that is an ongoing business concern is going to perform better than a dollar invested in a passive asset," said Mr. Decker. "The difference is management."
The large diversified advisers who built their business on direct property investing but later added REIT divisions to capture this anticipated growth, realized significant increases in their REIT portfolios.
The big gainers among the multiproduct firms include: Chicago-based LaSalle Advisors whose REIT portfolio grew 42% to $1.2 billion from $866 million; Aldrich Eastman Waltch's portfolio grew 84.7% to $277 million from $150 million; INVESCO Realty Advisors's REIT assets under management shot up 276.8% to $309 million from $82 million; and Fidelity Management Trust Company's REIT portfolio grew 80.7%, $150 million from $83 million.
REIT specialty managers also showed gains in assets, although not as significant as those realized by the multiproduct firms. Chicago-based EII Realty Securities showed the largest gain among those firms, 67.6%, growing to $377 million from $225 million.
Multiline firms took in a larger share of business because their direct property affiliations are attractive to pension funds, according to industry observers.
"They (pension funds) attribute value to other lines of our business," said Bill Thompson, managing director with LaSalle Advisors. "Our other real estate businesses provide information to our securities group, and that allows us to outperform the market."
"The mindset of institutional investors is from private market real estate," said H. Rennyson Merritt III, a director with AEW. "So their reference point is people who are knowledgeable about private real estate who can complement that with people experienced in public real estate stocks.
"You get better information if you have both areas of expertise in a shop," said Mr. Merritt.
Mr. Thompson said the growth of tax-exempt investments in REITs is an extension of the dual trends of investors wanting fewer managers and spending less time on real estate.
About 25% of LaSalle's growth in assets, said Mr. Thompson, is attributed to appreciation. The firm invests in actively managed REIT portfolios and makes tactical private placements in public REITs, he said.
"We have grown fairly rapidly in this area, but we are in control of that growth and may close our doors to new business," said Mr. Thompson.
AEW's growth in REIT assets received a $100 million boost earlier this year when Frank Russell Investment Management Co., Tacoma, Wash., selected them as a subadviser.
REITS are popular with pension funds because an investor gets property value, franchise value and liquidity, said Mr. Merritt.
"It is increasing recognition that operating companies are going to run the show in real estate," he said. "The paradigm has shifted to operating company investing."
Dallas-based INVESCO Realty Advisors' 66% increase in assets under management was due in large part to the growth in its REIT business, confirmed Whitney Ward, managing director. The firm's REIT assets under management have grown since the numbers reported to P&I, said Mr. Ward.
The company's growth also was driven by its separate account business, said Mr. Ward. "We've had a big run-up in assets from money invested and transfer portfolios," he said.
INVESCO, however, will be short $400 million during next year's report because it is relinquishing a $400 million participating mortgage portfolio it managed for the Teacher Retirement System of Texas.
"Our logic was to transfer our low-fee basis assets with higher-fee basis assets, so we can maintain research and services," said Mr. Ward. "Those things are expensive."
The mortgages, said Mr. Ward started out as participating debt that was converted to equity. "The fees were originally designed for the original structure, which ended up changing because the equity got squeezed," said Mr. Ward.
Growth in tax-exempt assets under management wasn't limited to public REIT securities.
New York-based DRA Advisors grew 105% to $783 million from $382 million. W.P. Carey & Co. Inc.'s tax-exempt assets grew 20% to $1.23 billion from just more than $1 billion.
DRA's business was due primarily to allocations of new money; W.P. Carey's growth was fueled by capital appreciation.
"The growth was attributed to our private REIT, the DRA Opportunity Fund" said Francis X. Tansey, chief investment officer. "That has assets of $210 million."
The fund's strategy is to buy assets from disadvantaged owners, said Mr. Tansey. Among its investments is a 29% stake in a partnership with Developers Diversified that purchased the community shopping centers from Homart Development Corp., a former Sears subsidiary.
"In addition to that, we took on several separate accounts," said Mr. Tansey.
Edward LaPuma, second vice president with New York-based W.P. Carey, said the company had an independent appraisal performed on Carey Institutional Properties, its private REIT that buys net-leased property. It returned 40%, said Mr. LaPuma.
"That 40% is three years of appreciation," said Mr. LaPuma. "CIP will be appraised annually from now on."