Faced with decreasing domestic real estate equity returns, U.S. pension plans are looking overseas and to less traditional areas for their real estate allocations.
Spurred by an expected decline in returns for the next several years, some consultants said pension executives will maintain or trim their allocations to the once-hot asset class. They are also shifting some of their real estate investments to riskier, off-the-beaten-track investments such as infrastructure, student housing, self-storage and air cargo facilities. Investors are also more global in their real estate outlooks.
Projections are, indeed, dismal:
cChicago-based LaSalle Investment Management's 2006-2008 investment outlook puts U.S. equity real estate returns for year-end 2008 at 5% overall and 4% for core investments.
cConsultant Townsend Group, Cleveland, expects U.S. real estate equity to return 9% annualized in the next 12 to 24 months.
By comparison, the NCREIF Property index returned 20.06% for the year ended Dec. 31, and 18.7% for the year ended June 30. Some 60% of the index is invested in core real estate.
U.S. real estate investment trusts are expected to return 6.25% this year, down from 7.5% in 2005, and core private real estate's anticipated return is one percentage point lower, according to the 2006 return forecast by Wilshire Associates Inc., Santa Monica, Calif.
These lower returns mean real estate no longer is expected to outpace asset classes such as U.S. equities; Wilshire projects domestic equity returns this year will be 8.4%.
But real estate investment managers have yet to feel the pinch, because most now offer global and individual country investment funds.