Institutional investors are rediscovering real estate investment trusts as returns and supply-demand dynamics heighten their allure for the first time since the financial crisis.
This year alone, domestic and international asset owners including the $233.9 billion California State Teachers' Retirement System; the €70 billion ($1.13 billion) Bayerische Versorgungskammer, Germany's largest public-sector pension group; and the $897 million Chicago Firemen's Annuity & Benefit Fund added REIT mandates or allocations.
Institutional investors in the U.S. have awarded six REIT mandates so far this year, up from four mandates in all of 2018, said Meredith Despins, Washington-based senior vice president, investment affairs and investor education at Nareit, citing data from Fundmap and Nareit.
As REIT returns have started to recover, investors also are attracted to REITs as a more liquid form of real estate that can help them create more directed real estate portfolios, access newer property types such as cell towers and manage their real estate portfolios.
In May, West Sacramento-based CalSTRS made its first REIT investment, committing $100 million to Principal Real Estate Investors for a U.S. mandate. Over the long term, officials expect the fund's REIT portfolio will make up 5% to 10% of the pension fund's $29.9 billion real estate portfolio, said Mike DiRe, CalSTRS' director of real estate.
CalSTRS has had the ability to invest in REITs for some time, he noted.
"We had it in our policy that we could invest in REITs but we never acted on it," Mr. DiRe said. "More and more investors are adding REITs and making it part of their real estate portfolio. It's part of our toolkit, especially in areas we can't access otherwise."
REITs have a better liquidity profile and allow investors to have a more directed portfolio, he said. For example, real estate open-end funds are similar to REITs but the open-end fund pools tend to hold a wider array of sectors than REITs, which tend to be focused on a specific property type and/or region. Additionally, investors can't get in and out of an open-end fund as easily — there are often queues of other investors waiting to invest or redeem their stakes, Mr. DiRe noted.
"We can use REITs to add specialty asset types such as cell towers, medical offices, student housing and senior housing. A lot of these categories the REIT markets covers very well," Mr. DiRe said.
CalSTRS can also use REITs to manage its real estate portfolio, he said.
"Pension fund investing is a long-term game. We think our REIT exposure could lean in and lean out," he said. "When and if REITs get overpriced, I would hope we would underweight them."
Global investors are also moving more capital into REITs. In May, Bayerische Versorgungskammer, Munich, hired Cohen & Steers Inc. to manage U.S. and European real estate securities via two real estate investment trust mandates. It also hired Timbercreek Investment Management Inc. for a mandate to manage a portfolio of European-listed REITs and B&I Capital AG for a global REIT mandate. BVK's overall allocation to REITs was €1.3 billion as of Dec. 31.