Real estate investment trusts once again were the darlings of the pension funds, raking in the most new assets for the third year running, according to Pensions & Investments' annual survey of real estate managers.
REIT assets under active management jumped a whopping 109.6% for the year ended June 30, a dramatic increase from the year-earlier rise of 35%. The equity index of the National Association of Real Estate Investment Trust rose 8.05% during that period.
The next most popular investment for the period was commercial mortgage-backed securities, which jumped 103.8% year to year. That is usually compared to the Lehman Brothers Aggregate Bond index, which returned 10.5% for the period, or the Lehman Brothers Corporate Bond index, which rose 11.4%.
In 1996, the dollar amount of these was so insignificant that the category wasn't even included in the survey.
Overall, total U.S. institutional tax-exempt assets under management by real estate managers increased to $191.1 billion as of June 30, compared with $143.6 billion a year earlier, an increase of 33.5%. However, the lion's share of the increase is due to the inclusion, for the first time, of the Teachers Insurance and Annuity Association -- College Retirement Equities Fund, New York, which accounted for $34.3 billion. Excluding TIAA-CREF, tax-exempt assets jumped $13.9 billion, or 9.6%, for the year ended June 30.
TIAA-CREF's real estate holdings are so huge, the money manager immediately jumped to the top of the P&I rankings.
As a result, although the top 10 didn't change much year to year, most moved down a spot. ERE Yarmouth, now known as Lend Lease Real Estate Investments, which was No. 1 last year, ranked second in '98, with $13.8 billion in U.S. institutional tax-exempt assets under management. J.P. Morgan Investment Management, New York, with $12.7 billion in assets, is now third.
Prudential Real Estate Investors, which was fifth last year, ranks fourth with $10.3 billion.
And Heitman Capital Management, Chicago, rounds out the top five with $9.6 billion.
The only newcomer to the top 10 list this year is Westbrook Partners LLC, New York, with $5.7 billion in assets. The New York-based firm leaped to ninth place from 27th last year, when it had $1.6 billion in assets. The firm, which started in 1994, has been rapidly raising capital for its Westbrook Real Estate Funds II and III, taking in $750 million in August 1997 for Fund II, which doubled in a short period, and another $1 billion for Fund III, which closed in June, said Mary Harris, principal, investor relations.
Most real estate experts are predicting big changes in the market during the next year, mainly because of the late summer downturn in the stock market, which in turn has hurt REITs and other real estate investments.
"The big investors have cooled off on REITs, now that they're down over 20% for the year," said Raymond G. Milnes Jr., national industry director, real estate, with KPMG Peat Marwick LLP, Chicago.
There are different ways to play off that, he believes. Some investors might say this is the time to buy, because the dividend yield is still attractive. Or it might be time to redeploy capital. Many investors have sold and are sitting on the sidelines, waiting for the next round of events.
Because of the stock market meltdown, some clients have been canceling deals, noted Mr. Milne. In one case, a REIT client stopped plans for a long-term debt offering because the price was too high. More REITs are doing private deals, he added.
But Dennis Yeskey, managing director at Deloitte & Touche Real Estate Services Group, New York, said that even though REITs have lost a lot of their value since January, it still makes sense to buy well-managed ones with consistent, but not radical, growth. "They're not meant to go boom boom (up, up), as they have," declared Mr. Yeskey. "Many are good buys, now, trading below book value, which makes them undervalued."
In fact, Joe Azelby, managing director and head of J.P. Morgan's real estate group, said even though the firm has not invested much in REITs in the past, it views the falling prices as an opportunity to expand that business. "We have the tools to approach it from both the real estate side and the capital market side, and be in front of the value buyers, so we're making more of an effort there," he said.
JOINT VENTURES RETURN
Another trend among pension funds is a return to equity real estate, which involves joint ventures with local developers, according to Deloitte & Touche's Mr. Yeskey. "Many funds backed away from such investments in the early '90s, but now they're returning. Those kinds of investments will be up 12% to 16% this year, compared with the stock market, which could be negative.," he said.
Paul Dolinoy, president of Lend Lease, said he's finding pension fund executives increasingly are interested in core and core-plus funds, now that it is more difficult to produce the opportunistic returns of the early '90s. "But they're also looking at high-income funds with a yield of 9% that appreciate 2% to 4% over time."
He and other real estate managers also are moving into international markets, where they believe there are more opportunistic returns. Lend Lease has been investing in Asia, Latin America, Western Europe and selected markets in Eastern Europe.
Mary Ludgin, president and chief executive officer of Heitman Capital in Chicago, also talked about international investments, noting her firm has been growing that business in the past three years, concentrating on Eastern Europe and Argentina. "It's a high-risk, high-return business. Those people who want to do it need to do it with local partners to be successful, which is how Heitman is proceeding," she said.
On the debt side of real estate assets, CMBS were extremely strong last year, but their appeal has waned for most lenders as spreads have widened, turning them into riskier investments.
Joe Luik, senior managing director at TIAA-CREF, noted that while lending was a strong business last year, now there is a lot of consolidation. TIAA-CREF is the dominant lender, with $3.1 billion in commercial mortgages, and $2.5 billion in commercial mortgage-backed securities and REIT lending.
"We look at well-leased properties and lend on those with strong cash flow, particularly in industrial markets," Mr. Luik said.
Overall, several real estate managers posted impressive year-over-year gains. Blackstone Real Estate Advisors, New York, for example, jumped to 33rd place with $1.1 billion in assets, up from 60th last year.
John Kukral, senior managing director, said the increase came from the closing of Blackstone Real Estate Partners II last October, which raised $600 million.
Fidelity Investments, Boston, with $1.9 billion in assets, shot up to rank 26th, from 47th last year. Jeff Gandel, vice president of Fidelity Management & Research, said the main growth came from its Fidelity Real Estate Asset Manager, which combines public and private market real estate in a single portfolio, and makes bets on which is most likely to do well. In 1998, Fidelity closed the third fund in the series, Fidelity Real Estate Asset Manager III, raising $335 million.
There also was a reshuffling at the top. LaSalle Advisors Capital Management Inc., New York, slid to ninth place from fifth, with $3.86 billion, while INVESCO Realty Advisors knocked Corporate Property Investors off the list and ranked 10th, with $3.6 billion.
LaSalle retained its spot as top-ranking REIT manager, but Cohen & Steers Capital Management Inc., New York, dropped to fifth from second place. Westbrook Partners and Morgan Stanley/Miller Anderson Sherrerd ranked second and third respectively in 1998.