Real estate investment trusts were again the most popular type of real estate investment vehicle among pension funds, according to a Pensions & Investments' survey of real estate managers.
Real estate money managers that actively manage REIT portfolios for pension funds saw their assets under management increase collectively to an adjusted 35% for the one-year period ended June 30, 1997.
The Equity index of the National Association of Real Estate Investment Trust rose 33.8% during that period.
This year's rise in actively managed REIT assets was down slightly from last year's 38% rise.
Overall, total tax-exempt assets under management by pension fund real estate money managers increased to $144.7 billion at June 30, 1997, up from $132 billion a year ago.
Leader of the pack
ERE Yarmouth, a merger of Equitable Real Estate Investment Management and The Yarmouth Group, headed P&I's ranking with total assets under management of $14.3 billion. Equitable Real Estate was last year's leader, a spot it has occupied for the last several years.
There was a slight change in the ranking's top 10 this year. New York-based J.P. Morgan Investment Management Inc. and Heitman Capital Management, Chicago, flip-flopped places, with J.P. Morgan moving to second and Heitman dropping to third.
Also changing places were Allegis Realty Investors LLC, Hartford, and Los Angeles-based Westmark Realty Advisors LLC. Allegis is now ranked eighth and Westmark is ninth.
Dallas-based INVESCO Realty Advisors is new to the top 10, moving up three spots and replacing CIGNA Investment Management, which dropped six places to 16 from 10.
William Grady, managing director with CIGNA, attributed the firm's drop to a combination of selling the properties and a change in the way it reports total assets under management.
Biggest movers and shakers
Among the top 50 real estate advisers, the biggest movers were the REIT managers: New York-based Cohen & Steers Capital Management Inc. jumped 14 places to 28 from 42; E.I.I. Realty Securities moved nine places to 40 from 49.
W.P. Carey & Co. Inc. took the largest tumble, dropping 14 places to 43 from 29. Attempts to reach W.P. Carey were unsuccessful.
The total tax-exempt assets under management are understated because of under reporting by the Wall Street investment banking firms that sponsor opportunistic funds.
These funds began to establish a presence in the pension fund real estate community in the early 1990s, raising several billions from plan sponsors.
A number of the opportunistic funds, nevertheless, did report their assets under management for the first time to P&I. These include: Westbrook Partners LLC, Starwood Capital Group LLC, Oaktree Capital Management LLC, DLJ Real Estate Capital Partners, Praedium Funds, Blackstone Real Estate Advisors, Walton Street Capital and Olympus Real Estate Corp.
Private equity real estate assets under management rose an adjusted 5% to $105.7 billion for the one-year period ended June 30. Last year's total was $99.5 billion. The NCREIF Property Index - which measures the performance of private equity real estate and is published by the National Council of Real Estate Investment Fiduciaries - rose 10.3% for the year ended June 30.
And the NCREIF-Property Index returned 10.3% the year ended June 30.
The old-fashioned way
While REITs were the story for the last half of 1996 and the first half of 1997, some real estate managers continued to grow their assets under management the old-fashioned way: by raising money for investment into privately owned real estate.
Also, those firms that have lending components to their investment program also realized gains in total tax-exempt assets under management.
The Giliberto-Levy Commercial Mortgage Performance Index rose 10.8% for the same year ended June 30.
John B. Levy, president of the John B. Levy Co., which compiles the Giliberto-Levy index, said the second quarter number is preliminary, but that the final number isn't expected to change much.
The large gainers in private equity real estate under management were Fidelity Investments, Boston; TGM Associates L.P., New York; GE Capital Investment Advisors Inc., San Francisco; Kennedy Associates Real Estate Counsel Inc., Seattle; and New York-based J.P. Morgan Investment Management Inc.
Advisers with mortgage capabilities that showed strong gains were: Boston-based AMRESCO
Advisors and AFL-CIO Building Investment Trust, Washington, D.C.
AMRESCO's total tax-exempt assets under management grew to $650 million from $426 million for the year ended June 30, 1996. The firm's mortgage assets under management rose to $225 million from $70 million.
The AFL-CIO Building Investment Trust's mortgage assets rose to $249 million from $120 million. Overall, the firm's total assets rose to $566 million from $395 million a year earlier.
Fidelity's total tax-exempt assets under management rose $647 million from $326 million, giving it its first top 50 ranking in P&I's survey.
Fidelity's rise was fueled by the amount it raised and invested in private equity real estate; the total rose to $307 million, from $82 million.
The irony of Fidelity's growth is its founding was based on giving investors the opportunity to invest beyond pure private equity real estate when it introduced its four-quadrant product in 1994.
But the firm remains committed to investing in public equity and both private and public real estate debt when they see opportunity, according to officials with the firm.
TGM Associates L.P. saw its assets rise to $406 million, up from $244 million. The firm is exclusively an investor in privately held real estate.
GE Capital Investment Advisors Inc.'s total assets under management rose to $1.7 billion from $1.3 billion a year earlier. Its growth largely was due to an increase in private equity real estate, which rose to $1.5 billion, from $1.1 billion.
Kennedy Associates' increase in total tax-exempt assets to $2 billion up from $1.6 billion a year earlier was driven by its increase in private equity assets under management to almost $1.8 billion from $1.3 billion.
J.P. Morgan Investment Management's total tax-exempt assets under management rose to $12.4 billion, up from $9 billion a year earlier. The firm's private equity assets under management rose to $3.9 billion, from $2.6 billion.
The firm also added active REIT management, which contributed $286 million to its total.
Why REIT investing is popular
REITs continued to be the big story among the pension fund advisers. In addition to catapulting up the rankings those first that are specialists in the sector, it also contributed to the totals of the larger firms that offer it as an added line of business.
REIT investing by pension funds is popular for a number of reasons, said Michael Humphrey, a consultant with Cleveland-based Courtland Partners.
"By investing in REITs you can immediately deploy your real estate allocation dollars," said Mr. Humphrey.
"In particular, for smaller pension funds with less than $1 billion under management, if they have a 10% or less allocation to real estate, REITs offer them the ability to get dollars out in a way that complements the existing portfolio and remedies certain concerns with respect to diversification."
Mr. Humphrey noted that a pension fund with $1 billion in total assets and a 10% allocation to real estate is unlikely to own a regional mall because of the property's price tag. But it can get exposure to that key property type through the REIT market, he said.
REIT managers are increasingly being hired to manage portfolios of specific property types in order to correct an imbalance in a pension fund's property allocation, said Mr. Humphrey.
"We expect to see those pension funds with less than a $100 million allocation to real estate rely more heavily on the REIT market for real estate exposure," he said.
Who gained the most
The largest gains by REIT managers were realized by E.I.I Realty Securities Inc., whose tax-exempt assets under management rose to $841 million from $377 million.
Cohen & Steers Capital Management Inc.'s tax-exempt assets under management rose to $1.3 billion from $726 million a year earlier.
CRA Real Estate Securities, cracked the top 50 this year - at No. 37 - with total tax-exempt assets of $903 million.
Active REIT portfolio management was a growth business for many of the large multiline real estate money managers, often out pacing minuscule growth of their other lines of business.
In addition to J.P. Morgan, REITs represented a growth area for ERE Yarmouth's, whose REIT assets grew to $169 million from $17 million.
Chicago-based Heitman Capital Management's total tax-exempt assets under management declined to $10.6 billion from $11.1, yet its REIT business rose to $331 million from $166 million.
Crosstown rival LaSalle Advisors saw its total tax-exempt assets grow to $8.1 billion from $7.6 billion, with its REIT management subsidiary accounting for $1.7 billion, up from $1.2 billion.
The RREEF Funds, Chicago, saw its total tax-exempt assets of $7.1 billion buoyed by a rise in REIT assets under management to $696 million, from $399 million a year earlier.
INVESCO's jump into the top 10 among real estate managers is directly attributable to the growth in its REIT business. The firm's tax-exempt REIT assets under management grew to $680 million from $309 million a year earlier.
The firm's total tax-exempt assets under management grew to $3.1 billion from $2.9 billion a year earlier.
For AEW Capital Management L.P., REITs represented its only growth sector, rising to $390 million from $277 million.
The firm, which was merged earlier this year with Copley Real Estate Advisors, had total tax-exempt assets of $5.7 billion, down from a combined $7 billion a year earlier.
AEW's total tax-exempt assets declined because the firm is liquidating many of the old Copley and AEW commingled funds, said Steven Corkin, managing director.
The fund also is liquidating takeover business that had boosted its assets under management in past years, said Mr. Corkin.