Real estate managers back over $1 trillion again

Investors' appetite for income-producing properties and relative returns, combined with a rise in real estate values, pushed up total worldwide assets of the largest institutional real estate money managers, Pensions & Investments' annual survey shows.

Assets jumped 13.7% to $1.003 trillion in the year ended June 30, reaching the $1 trillion mark for just the second time ever and the first since P&I's 2008 survey.

That compares to a 9% increase a year earlier and an 11.7% rise in P&I's 2012 survey. The growth of U.S. institutional tax-exempt assets in this year's survey continued its upward trajectory, growing 12.5% to $466.3 billion. Of that, real estate equity assets grew 13.1% to $369.5 billion.

Discretionary assets for U.S. institutional tax-exempt investors rose 12% to $383 billion during the period.

Among the 50 largest managers for U.S. institutional tax-exempt clients, assets rose 12.4% to $423.6 billion.

The top 10 managers of U.S. institutional tax-exempt assets account for 59% of the total. As a group, assets of the top 10 managers of U.S. institutional tax-exempt assets grew 15.6%.

Managers' mezzanine assets grew 7% to $4.89 billion. The top 10 mezzanine managers accounted for 87% of the assets, losing some ground from last year's survey when they had 94.5% of the assets.

Real estate investment trust managers' total worldwide assets were up 9.4% to $394.6 billion, while REIT securities managed for U.S. institutional tax exempt clients increased 19.8% to $113.9 billion in the 12 months ended June 30.

This year's survey for the first time asked about assets managed for defined contribution plans. Managers of REITs ran $15.1 billion for defined contribution plans, accounting for 13.2% of REIT managers' total assets managed for U.S. tax-exempt clients.

Six of the top 10 REIT managers run REIT assets in defined contribution plans — BlackRock Inc., Vanguard Group Inc., Invesco Real Estate, Morgan Stanley Real Estate Securities, State Street Global Advisors and EII Capital Management Inc.

Five managers run a total of $14.3 billion in U.S. tax-exempt real estate assets for defined contribution plans, of which $2.5 billion is in real estate equity. Those managers are Prudential Financial, J.P. Morgan Asset Management, Principal Real Estate Investors, Timberland Investment Resources and UBS Global Real Estate.

During the year ended June 30, the NCREIF Property index return was 11.2%. The total return of the FTSE NAREIT All REITs index, which includes both equity and mortgage REITs, was up 13.02%, while the total return of the FTSE NAREIT All Equity REITs index, which excludes mortgages, was up 13.71%, according to data provided by the Washington-based National Association of Real Estate Investment Trusts.

Not included in the rankings again this year is Blackstone Group LP, New York, which tracks its data in a different way. Blackstone Group executives nevertheless did provide some data. As of June 30, Blackstone Real Estate's worldwide AUM— defined as equity value net of leverage and unused capital commitments — totaled $80.4 billion, of which firm executives estimate one-third is managed for U.S. tax-exempt investors.

(Blackstone's tax-exempt estimate was calculated by multiplying the total real estate assets under management by a ratio of total capital raised in the U.S. from tax-exempt investors for active funds, divided by total real estate capital raised.)

“Broadly speaking, investment-grade, commercial real estate performed for pension plans during the past 12 months. It did what it was supposed to do, providing a diversifying alternative to stocks and bonds,” said David Glickman, managing director in the Carmel, Calif., office of consulting firm Pension Consulting Alliance Inc.

“During the period, as underlying fundamentals of occupancy and rental growth improved, it remained a relatively attractive asset class for many retirement system investors,” he said.

Likewise, relative returns attracted institutional investors.

“It (real estate) offered higher current returns than many fixed-income assets,” Mr. Glickman said. “Real estate was also alluring compared to public equities, as many public equities were perceived to be even more fully valued than real estate in some people's minds.”

Once again, Prudential was in the top slot on P&I's rankings of the largest managers of worldwide institutional real estate assets.

For managers of U.S tax-exempt assets, TIAA-CREF bumped Pru out of first place. TIAA-CREF, which moved up from second place, reported $48 billion, up 19%.

Prudential Financial's total worldwide assets grew 9% to $87 billion, while its assets for U.S. institutional tax-exempt investors were up 12% to $46.4 billion. (The combined figures represent both Prudential Real Estate Investors and Prudential Mortgage Capital Co.)

The other top-ranked firms for U.S. institutional tax-exempt assets were J.P. Morgan Asset Management, third, with assets up 21% to $45.3 billion; UBS Global Real Estate, $22.2 billion, a gain of 8% to stay in fourth; and Clarion Partners, remaining fifth, with its real estate assets managed for U.S. institutional tax-exempt clients rising 11% to $16.3 billion.

A portion of TIAA-CREF's increase in assets under management came from the April 2014 close of a joint venture with Henderson Global Investors, forming a new real estate investment management company, TIAA Henderson Real Estate, Phil McAndrews, senior managing director and chief investment officer, global real estate, said in an e-mailed response to questions. (TIAA-CREF owns a 60% stake in TIAA Henderson.)

“TIAA-CREF acquired Henderson's North American property business, which increased overall assets by $2.6 billion,” Mr. McAndrews said.

TIAA Henderson Real estate has a combined $22.6 billion in assets under management across 50 funds and mandates, he noted.

Also contributing to the increases is price appreciation of existing properties and more capital commitments to joint ventures with global clients for trophy U.S. properties, Mr. McAndrews stated.

“It's been a very good period for us,” said Eric Adler, London-based CEO of Prudential Real Estate Investors. “We've been net in favor of more buying than selling.”

Prudential's portfolios also increased in value during the survey period, particularly in the U.S., he said. Mr. Adler said Prudential is selling some of its properties now to produce income to take advantage of the higher prices.

Prudential also tops the list of mezzanine managers with $1.5 billion in assets, despite the 12% drop from the previous year. The dip is due to Prudential being reimbursed for older loans, Mr. Adler said.

Overall, mezzanine assets of the top 10 managers were down 8.7% to $4.3 billion.

The mezzanine sector is starting to get more crowded, causing returns to go down, Mr. Adler said.

Meanwhile, assets of the top 10 managers of U.S. tax-exempt core portfolios increased 16.6% to $183.5 billion in the year ended June 30. During the same period, the Open-End Diversified Core index (NCREIF-ODCE) return was 12.8%.

Some managers took the opportunity to sell off some stabilized properties.

“We've been an extremely active seller. For some assets, we were waiting for strong capital markets to sell assets and these are strong capital markets,” said Hugh Macdonnell, managing director at Clarion Partners in New York.

“We are clearly a net buyer (and developer) of both apartments and industrial.” he said. “We are net buyers of office in some areas and net sellers of office in other areas,” he added.

Clarion Partners' strategy continues to be one of investing in U.S. sub-markets that are centers of economic growth.

“These are places where we see industries that revolve around sectors such as energy and health care,” he said. “We are doing development and making acquisitions because that's where we see strong job growth .... parts of New York, parts of San Francisco, parts of Seattle and parts of Texas are where we've seen strong job growth and where we have been very active.”

Managers' investment for foreign clients in U.S. real estate is up 33% to $62.1 billion, besting the 18% growth rate in last year's survey.

Assets of Prudential Financial, which tops the list of managers investing in U.S. real estate for foreign clients again this year, climbed 22.2% to $6.6 billion. Part of the increase is from Prudential's separate accounts business.

“We have been getting more money for separate accounts, mainly outside the U.S.,” Mr. Adler said. “We see a trend from big sovereign wealth funds. There's a lot of Asian capital moving west.”

Second-ranked Ares Capital Management's U.S. real estate managed for foreign clients jumped a whopping 131% to $4.7 billion. Ares was followed by Brookfield Asset Management, which was not on last year's list for domestic real estate for foreign clients and ranked third with $3.8 billion; Morgan Stanley-Real Estate Investing, fourth with assets up 59% to $3.5 billion; and Clarion Partners, fifth with assets up 13% to $3.4 billion.

“There's been an increasing flow of capital by non-U.S. investors. ... Risk-adjusted returns for U.S. real estate look very attractive relative to real estate in their home countries and relative to other asset classes,” explained Mr. Macdonnell.

Farmland assets grew a whopping 47.6% to $9.3 billion in the year ended June 30. A portion of the increase was derived from increased appreciation; the NCREIF Farmland index was up 17.7% for the same period.

This year's list included two managers not on last year's: Prudential in second position with $1.8 billion; and Brookfield Asset Management, sixth, with $88 million.

Once again topping this year's list of farmland managers is TIAA-CREF, with assets up 21.6% to $4.5 billion.

In an e-mailed response to questions, Justin “Biff” Ourso, senior director and portfolio manager for agriculture investments at TIAA-CREF, attributed the growth largely to “new asset purchases supplemented by underlying appreciation.”

Timber assets grew 3% to $17.7 billion. Most of the top five timber managers' assets increased during the period. Forest Investment Associates was again first, with assets up 2% to $3.42 billion; Hancock Timber Resource Group, second (up from third last year), with assets up 15% to $3.4 billion; Campbell Global, third (from second last year), with assets up 8.6% to $3.3 billion; and Molpus Woodland Group again fifth, up 25% to $1.7 billion.

However, fourth-place TIAA-CREF's timber assets fell 11% to $2.1 billion.

During the period, the NCREIF Timberland index was up 9.9%.

Sandra LaBaugh, senior director and portfolio manager for global forestry at TIAA-CREF, said in an e-mail that the drop was the result of a record-keeping issue.

“We are active portfolio managers and continue to seek opportunities to expand our timber exposure in attractive markets,” Ms. LaBaugh said.