Large endowments including Southern Methodist University and Yale University reduced investments in real estate through the middle of last year before values cooled, a timely move that could help their performance.
Southern Methodist's $1.5 billion endowment decreased its real estate holdings by 84% to 1.2% — the biggest drop among schools — in the year ended June 2015 from two years earlier, according to responses to a congressional inquiry. Yale trimmed its allocation 31% to 14% in its $25.6 billion fund in the same period.
The sell-off might be a bright spot for endowments as they struggle to boost performance in the fiscal year that ended June 30. Real estate was one of the best-performing investment categories in fiscal 2015, prompting some endowments to cash in.
“It could have been a good time to sell the asset because of what they perceived to be cyclical high prices,” said Christy Fields, an investment consultant with Pension Consulting Alliance. “People are feeling like the pricing is rich and they're happy to take some money off the table and keep some dry powder for the next potential correction.”
U.S. commercial real estate values have fallen this year following a six-year streak of uninterrupted increases. Prices may decline as much as 5% in the next 12 months because of volatility in the public markets, tightened regulations and maturing loans, according to a June 20 report by Pacific Investment Management Co.
The real estate trims between fiscal years 2013 to 2015 were detailed in responses to a congressional inquiry this spring about how tax-exempt university endowments spend their money. The richest 56 private colleges were asked a range of questions including the amount of “real assets” held, excluding publicly traded stocks or real estate investment trusts. Most of the investments are held through private equity funds or direct property holdings.
Among the 49 responses provided by schools to Bloomberg, George Washington University's fund, at $1.6 billion in assets, held the highest allocation of real estate at 42%.
The shifts may have occurred because private equity funds returned profit to the endowments, which didn't allocate new capital to the sector. Other asset classes may have outpaced real estate, reducing the share of the pie devoted to the group.
SMU sold real estate holdings because the property values had “increased significantly over time,” Kent Best, a school spokesman, said in a statement.
“This sale improved the liquidity position of the SMU endowment and generated additional money that could be invested into other opportunities,” he said.
Yale and other schools, which provided the data to the inquiry, declined to discuss their holdings.