Real estate assets back on upswing

Real estate investment managers reversed two years of asset declines, according to Pensions & Investments' annual survey, with a 7.2% increase in worldwide assets under management to $726 billion for the year ended June 30.

Assets had dipped 5% in the 2010 survey and plunged 30% in 2009. The survey has been conducted since 1980; worldwide AUM peaked in 2008 at $1 trillion.

U.S. institutional tax-exempt assets of the 106 managers that participated in the latest survey grew 1.7% to $345.6 billion. In the previous two surveys, 100 managers participated. During the most recent survey period, the NCREIF Property index returned 16.7%.

Among the 50 largest managers, tax-exempt assets grew 2% to $308.3 billion as of June 30, a change in direction from the 5.2% decline reflected in the 2010 survey and the 26% drop in 2009.

More than half, 57.2%, of that $308.3 billion was managed by the top 10 firms, compared with 53% in last year's survey.

The 12 months ended June 30 was a time of change for many real estate managers.

A few investment banks got out of the real estate investment management business. Credit Suisse last year spun off its commercial real estate arm, DLJ Real Estate Capital Partners, in a management buyout. In July 2010, ING Groep NV sold its minority interest in ING Clarion Capital LLC and subsidiary ING Clarion Capital Loan Services LLC to the company's management and other owners; that company was renamed Torchlight Investors LLC. At the same time, Clarion Partners spun out of ING in a management buyout that culminated in February.

Managers also were active for the survey period, said Mark Grinis, New York-based Americas transaction real estate leader at Ernst & Young. “It's a highly active market of those harvesting (selling properties) and those acquiring,” Mr. Grinis said.

Core investments, which are the highest quality, most stable investments, have been the most active style for the past two years, he said.

But the activity hasn't led to less uncertainty over the commercial real estate market, he added. “There's no shortage of uncertainty out there. Is AUM (assets under management) increasing or is it just changing hands?” he queried.

It appears to be a little bit of both, according to this year's survey results.

For all the activity, core grew slightly to 65.8% of the portfolios of the top 50 managers of U.S. institutional, tax-exempt real estate assets, from 65.3% as of June 30, 2010. Value-added investments grew by close to two percentage points to 20% and opportunistic declined by just more than two percentage points, to 14.2%.

A number of opportunity funds that closed in 2005 through 2007 have some property values that recovered a bit, but are still not performing well, Mr. Grinis said. “Investors are anxious to get resolution,” he explained. “Investors want their money back and they want to close out the difficult vintage funds.”

While opportunity fund managers are selling properties in order to close out pre-crisis funds, there are few deals. Banks have been very slow to sell the properties that opportunity fund managers seek, Mr. Grinis explained. “There is no pipeline, no deal flow.”

All the managers in the top 10 ranked by U.S. institutional tax-exempt assets witnessed an increase in assets in this year's survey. TIAA-CREF, Prudential Real Estate and J.P. Morgan Asset Management held on to their respective first-, second- and third-place slots on the list of managers of tax-exempt assets. (Principal Real Estate Investors LLC, which was No. 4 with $18.598 billion in U.S. institutional tax-exempt assets under management in 2010, declined to submit numbers for the latest survey.)

TIAA-CREF's tax-exempt assets grew by 9.4% to $33.9 billion during the year ended June 30. “We had inflows from clients that like our capabilities in this space,” said Tom Garbutt, senior managing director and head of global real estate at TIAA-CREF, New York. “We also made good value purchases to enhance our portfolios.”

TIAA-CREF increased assets from international clients during the survey period. “We did start relationships with new clients in various mandates: some real estate, some agriculture,” Mr. Garbutt said. “That capital truly has come from many different corners of the globe.”

Three managers moved up in the rankings thanks to double-digit percentage increases in U.S. institutional tax-exempt assets. Among them are RREEF Real Estate, which jumped to fifth place from 10th with a 43% increase in assets to $12.96 billion; Starwood Capital Group LLC bumped up two spots to 10th place with a 30% increase to $9.7 billion, and Heitman had a 14.6% increase in assets to $11.7 billion moving it up one spot to sixth.

“During this period, we have achieved strong client capital flows into both existing and new and innovative products,” stated Pierre Cherki, managing director and global head of RREEF Real Estate in an e-mail. “While we benefited from some market appreciation, RREEF Real Estate's commitment to a disciplined investment approach as well as hiring key talent has contributed to strong performance in strategies such as global securities.”

J.P. Morgan had strong flows of capital into core strategies in 2010 through mid-2011, said Joseph Azelby, managing director at J.P. Morgan Asset Management in an interview. The firm's largest investor group is large U.S. institutions.

J.P. Morgan ranked second behind TIAA-CREF in P&I's listing of the top 10 managers of core assets, with $21.6 billion in the strategy. TIAA-CREF had $31.1 billion invested in core assets. J.P. Morgan also was the top value-added manager, with $6.2 billion in that strategy.

Investors again began hiring J.P. Morgan for separate accounts, Mr. Azelby said. “I think real estate on a relative basis was attractive as the equity markets started to recover and people were underallocated to real estate and had a desire to normalize the allocation.”

Among the property types tracked by P&I, the largest portion of the top 50 managers' U.S. institutional tax-exempt portfolios by weighted average — 33.6% — was invested in office and commercial properties, virtually unchanged from last year's 33.5%. The biggest gain was in multifamily housing, which grew two percentage points to 19.3%. The largest declines were in industrial properties, which dipped to 11.8% from 13%, and hotels/resorts to 4% from 4.9%.

“We continue to see nothing but homeownership percentages going down,” Ernst & Young's Mr. Grinis said. “With difficulty in financing and a negative outlook on housing, people are choosing to rent.”

For the first time, P&I separated timber and farmland in its survey. Timber accounts for 4.5% of managers' portfolios, and farmland, 1%. By comparison, last year timber and agriculture combined amounted to 5.7%. For the 12 months ended June 30, the NCREIF Timberland index return was 0.52% and NCREIF Farmland index, 11.05%.

TIAA-CREF topped the list of farmland managers with $3.4 billion in assets.

“We believe a key reason we see strong interest in agriculture today is a function of supply and demand,” Jose Minaya, head of natural resources and infrastructure investments in the Charlotte, N.C., office of TIAA-CREF, said in an e-mail. “Supplies are at historic lows in terms of inventories, yet we're seeing a global population that continues to increase, and a growing middle class in emerging markets, where people are eating more protein.”

The farmland asset class is still in its early days, Mr. Minaya noted. “Buyers of farmland today are still predominantly farmers and institutional ownership,” he said.

TIAA-CREF was also among the top 10 timber investors in the latest survey, with $1.58 billion in assets, ranking the firm in fifth place for the category.

“At the end of the day, the attraction for investors looking at agriculture or timber is inherent in its inelastic demand; a growing world population — we're closing in on 7 billion people — have to eat and live somewhere, and they need these natural resources to do so,” he stated.

Agriculture and timber also offer “non-correlated returns to traditional assets such as stocks and bonds and even commercial real estate.”