Real estate managers' assets up 11.7% for year

Updated with correction

Boosted by new acquisitions and property appreciation, the top real estate money managers' total worldwide assets under management increased 11.7% to $811 billion in the year ended June 30, according to Pensions & Investments' annual survey of the largest real estate managers.

Real estate assets managed for U.S. institutional tax-exempt investors grew 8.9% to $377 billion, while real estate equity managed for those investors rose 7.3% to $293.4 billion.

Last year's survey reflected the first time since the financial crisis of 2008 that the change in top real estate managers' combined assets was in positive territory; it also was an about-face from 2009 when managers' assets plunged 30%.

One of the largest jumps in worldwide assets under management was in mortgages, which were up 23.6% to $137.2 billion from the same period last year. And the largest worldwide asset decline was in mezzanine, plunging 38.7% as of June 30 to $4.85 billion.

Total worldwide assets for managers of real estate investment trusts increased by 9.3% to $295.7 billion, while assets for managers of institutional, tax-exempt assets rose 19.5% to $85.1 billion.

During the survey period, the NCREIF Property index returned 12%. The FTSE NAREIT All REITs index, which includes both equity and mortgage REITs, returned 12.65% for the period and the FTSE NAREIT All Equity REITs index, which excludes mortgages, was up 12.48%, according to data provided by Washington-based National Association of Real Estate Investment Trusts.

Some 57.4% of the U.S. institutional tax-exempt real estate assets are managed by the top 10 managers, up from 57.2% from last year's survey.

“We were in a rising market” during the survey period, said Jamie Shen, senior vice president, real asset consulting, at Callan Associates Inc., San Francisco. “I would attribute much of the increase to appreciation.”

Real estate managers also had money to spend, Ms. Shen said.

“In our client base, we have been making new allocations to managers,” Ms. Shen said. “If the managers were able to find attractive acquisitions, they had capital to make those acquisitions.”

Ms. Shen noted that there are still queues to invest in open-end funds. Also, “most institutional investors are still making new allocations to core and income-producing segments of the market,” she said.

Investors were not as interested in mezzanine. Mezzanine investments were “wiped out in the downturn, so they are shy to get back in there,” Ms. Shen said.

While still a small segment of the market, farmland has attracted more interest over the past two years. In a low-bond-rate environment, farmland's 7% to 9% return plus an income component has become more appealing, Ms. Shen said. There are queues to invest with the largest farmland managers, she added.

The increased interest combined with returns could explain the overall increase in farmland. Institutional tax-exempt assets in farmland were up 9.67% to $5.5 billion. For the year ended June 30, the NCREIF Farmland index rose 15.7%.

Prudential Real Estate Investors has a sizable queue for its open-end fund, PRISA which has $10.8 billion in net assets, said Kevin R. Smith, senior managing director and head of Prudential's U.S. real estate business based in Madison, N.J. “Investors continuing to seek out core,” he said.

PRISA's entry queue is around $800 million. The fund has had an entry queue for the last two years, Mr. Smith said.

Prudential Real Estate was in the top slot for both total worldwide real estate assets and U.S. institutional tax-exempt assets. Last year, Prudential was second, behind TIAA-CREF, in P&I's listing of the top managers of tax-exempt assets. Over the 12-month period ended June 30, Prudential's U.S. institutional tax-exempt assets increased 18.5% to $36.8 billion.

“Most of the growth is from investing new money, adding new assets,” Mr. Smith said.

Much of the new investments have been in primarily two sectors: core real estate and mortgages.

Prudential also was No. 2 — again behind TIAA-CREF — for real estate managers with institutional tax-exempt mortgage assets under management. The two real estate managers held the same positions last year. Prudential Real Estate's mortgage assets increased by 21.5% to $13.7 billion. TIAA-CREF's mortgage assets rose by 4.5% to $13.8 billion.

Investors are interested in both core real estate and mortgages because they are searching for income, Mr. Smith said.

“Institutional investors who look across the landscape of all investment alternatives, particularly fixed-income allocations, and it is really hard to find good investment opportunities,” Mr. Smith said.

Both mortgages and core real estate have an income component. Core real estate also has the added potential for capital appreciation, Mr. Smith explained.

Philip J. McAndrews, managing director and head of global real estate transactions and joint ventures at New York-based TIAA-CREF, said that mortgages was an area of growth over the 12-month period in addition to equity real estate acquisitions. TIAA-CREF's U.S. institutional tax-exempt assets increased by 6.6% to $36 billion during the period.

TIAA-CREF's real estate investment business grew in most areas during the survey period, including increased equity real estate acquisitions and an upturn in mezzanine financing, Mr. McAndrews said.

“Across the board, we are back in business in a very full way,” Mr. McAndrews said. “The pricing on the debt side is compelling. We see good values as a mortgage lender and equity investor in real estate.”

J.P. Morgan Asset Management was in the third slot for real estate assets managed for U.S. institutional tax-exempt clients, up 15% to $32.6 billion, and in fifth for worldwide assets, rising 12.45% to $37.6 billion.

“Assets under management increases have been driven by continued strong client inflows as well as significant appreciation in the underlying asset base. Clients have been increasing their allocations to real assets in general and real estate specifically in the face of lower fixed-income yields,” said Kevin Fax-on, New York-based managing director and head of real estate Americas, J.P. Morgan Asset Management, in an e-mail.

J.P. Morgan also has queues for its open-end funds, ranging from 4% to 7% of net asset value, Mr. Faxon said.

“We view queues in this range as "normalized,' allowing clients' funds generally to be drawn within four to six months of making a commitment,” Mr. Faxon wrote.

“We started seeing investment queues in core in mid-2010 and in value-added in early 2011,” Mr. Faxon added.

CBRE Global Investors jumped to third in worldwide assets under management for the year ended June 30, from seventh, with a 114% increase in assets to $50.3 billion. Much of the increase was the result of the Los Angeles-based real estate manager's acquisition of portions of the non-U.S. portion of ING Group NV's real estate investment management business. The acquisition included global direct real estate in Europe and Asia, and also global real estate securities and funds of funds, said Michael K. McMenomy, global head of investor services. The deal closed July 1, 2011, missing P&I's cutoff for last year's survey by a day.

CBRE Global's institutional tax-exempt assets grew by 4% to $8.1 billion. These assets are mostly based in the U.S. and were not part of the ING acquisition.

Mr. McMenomy said that absent the ING merger, the firm's growth in assets came from raising and investing capital. “The market was offering a little bit of something for everybody,” Mr. McMenomy said.

There were deals in core real estate, especially in so-called gateway cities, such as San Francisco, New York, Washington and Los Angeles, as well as investment opportunities in other, less prime, assets providing property owners with capital to improve properties, Mr. McMenomy said. “It was one of those periods of time where there was an opportunity for all risk-styled investor capital,” he said.

In this year's survey, P&I for the first time asked managers for assets in core, value-added and opportunistic strategies. The top 10 managers of core strategies had $126.8 billion combined in assets, decidedly larger than the top 10 managers of value-added strategies, at $31.9 billion, and opportunistic real estate, at $13.8 billion.

Mr.McMenomy said CBRE Global has seen an increase in investor interest in non-core real estate. The dislocation in the market has produced “functional” properties owned by property owners that are forced to sell to get the cash to solve other deficiencies in their real estate portfolios, he said. These sellers may be forced to generate cash and pay down non-conforming debt on other assets in their portfolios, he added.

“They put the properties up for sale that could generate capital on a sale to relieve challenges elsewhere in the seller's portfolio,” he said.

International assets managed for U.S. clients declined 5.23%, but non-U.S. assets for global clients were up 10.46% and U.S. assets for foreign clients rose 10.46%.

Invesco Real Estate's assets managed for U.S. tax-exempt clients increased by 13.89% during the period to $12.3 billion.

“The U.S. is the preferred region for most investors today. U.S. real estate offers income, stability and a relatively attractive economy,” said Max Swango, managing director, Invesco Real Estate. “Europe is largely off the table except for the highest quality assets in a few capital cities. Asia is attractive given its growth prospects but investors are being cautious there.”

At Invesco, U.S. public pension funds still dominate fund flows, Mr. Swango said. However, capital is also flowing from non-U.S. investors including sovereign wealth funds, insurance companies and pension plans, he added.

In the U.S., although investors appear to have an increased interest in separate accounts, Invesco Real Estate soon no longer will accept new separate accounts from U.S. clients, Mr. Swango said. (Separate accounts will still be available to non-U.S. investors.)

Invesco Real Estate currently has $10 billion in separate accounts for U.S. investors. Executives didn't want to have more separate accounts than they could effectively manage, Mr. Swango said. U.S. investors will still be able to invest in Invesco Real Estate's commingled funds.