Worldwide real estate assets rise to $1.7 trillion in 2019

Despite an abrupt pandemic-induced break in fundraising and transaction activity in the first six months of 2020, record-setting fundraising and strong transaction volume in 2019 helped buoy managers' worldwide assets under management to $1.73 trillion in the year ended June 30.

However, most of the 8.5% increase in worldwide real estate AUM can be attributed to the addition of AXA Investment Managers - Real Assets, which did not participate in last year's survey and is the third-largest manager this year with $113.7 billion. By comparison, real estate managers' worldwide assets grew by 7.2% in the prior 12-month period, according to Pensions & Investments' annual survey of real estate managers.

Worldwide real estate equity AUM was up 9.7% to $1.25 trillion in the year ended June 30.

Also giving worldwide AUM a boost is that overall real estate valuations have yet to experience the significant drop that industry executives expected.

"Because of the nature of the crisis, (global) valuations, in aggregate, haven't really fallen that much" between the last six months of 2019 and the first half of 2020, said Will Robson, London-based executive director and global head of real estate solutions research at MSCI Inc. That is the case even though in the first six months of 2020, net operating income figures for properties worldwide in certain sectors such as hotels and retail "have fallen off a cliff," he said.

The pandemic and recession it caused have been a “huge shock to the real economy,” causing the income portion of global real estate returns to drop “harder and faster” than market sentiment around how much the properties are worth, he said. It is taking a while for market sentiment to catch up, Mr. Robson added.

In the quarter ended June 30, the number of sales dropped to 30 properties from typical transaction volume of between 100 and 200 property sales each quarter, according to the National Council of Real Estate Investment Fiduciaries. This drop in deal volume is making it difficult to appraise properties. The transaction volume is based on more than 8,600 commercial U.S. properties in the NCREIF index.

“When you move to a turning point where capital values turn negative ... with any sector of the market ... the difference between the best and worst performing properties will widen,” Mr. Robson said. “At the moment, we’re only seeing that in retail in any significant way.”
According to Real Capital Analytics Inc.’s latest National Trends report, national commercial real estate sales activity is down 68% year-over-year in August and down 36% year-to-date.

Jim Costello, senior vice president of Real Capital Analytics, said that sales activity for all of 2019 was $593.7 billion. Activity through August of this year was $222.1 billion while activity from January to August of last year was $345.1 billion. That is despite the fact that interest rates for commercial mortgages are low.

Most debt categories of worldwide real estate AUM increased in the year ended June 30 with the exception of hybrid debt, which had a 58.1% drop to $11.2 billion.

Worldwide loan assets skyrocketed 152.8% to $57.1 billion, continuing a trend from the 2019 survey in which the category also exhibited a triple-digit advance. However, this year’s data is skewed because AXA, which had $28.7 billion in worldwide assets in loans, was absent from last year’s survey results. Rounding out the categories, mezzanine was up 15.4% to $22.9 billion and mortgages increased by 1.5% to $335.5 billion.

Indeed, worldwide loans and mezzanine assets have had a dramatic five-year run, increasing by 2,609% and 80%, respectively, albeit from small bases.

In spite of building investor demand, worldwide assets managed as co-investments reversed a pattern of steady growth over the last several years with a 13.4% decline to $74 billion, after spiking 40.9% in the prior 12-month period. Even with the decline, co-investments still swelled by 184.1% over the five years ended June 30.

At the end of 2019, global returns were “pretty healthy” but they were starting to decelerate, Mr. Robson said. Valuations were high and commercial real estate worldwide was coming to the end of a cycle anyway, he added.

The deceleration continued in the first quarter of 2020, with then a big step down in June when capital growth turned negative, Mr. Robson said.
It was the same story in the U.S.

The NCREIF Property index was up 2.7% for the 12 months ended June 30. The return for the year was driven down by a -0.99% return in the second quarter, which was the lowest since the fourth quarter of 2009, NCREIF reported. Returns turned negative in the second quarter because valuations (less capital expenditures) declined more than the properties’ net operating income. Total returns dropped for all property sectors in the second quarter and were negative for all sectors except industrial, NCREIF data shows.

The NCREIF Open End Diversified Core Equity index had a net return of -1.75% for the quarter and 1.33% for the year ended June 30.

Total assets in real estate investment trusts were down 6% to $419.1 billion and REIT assets managed for U.S. tax-exempt institutions dropped 10.6% to $99.5 billion in the year ended June 30.

Returns were a big part of the declines in REIT assets. The FTSE Nareit All REITs index, which includes equity and mortgage REITs, was down 8.36% and the FTSE Nareit All Equity REITs index was down 6.47% for the 12 months ended June 30.

Real estate assets managed overall for U.S. institutional tax-exempt clients were up 2.9% to $608 billion, which surpassed a 1.1% upward blip in the year-earlier survey.

The sector rise in AUM for domestic institutional tax-exempt clients also mimicked worldwide real estate, with most debt categories outperforming equity. Real estate equity was nearly flat, up 0.5% to $470.2 billion. Loans grew a whopping 361.8%, albeit from a low base, to $14.3 billion.

Mezzanine had the next largest increase of 14.8% to $10.5 billion, followed by mortgages up 5.8% to $78.9 billion.

As with global assets, hybrid debt managed for U.S. tax-exempt institutional investors lost assets, falling by 2.9% to $6.7 billion.

For the second consecutive year, real estate assets managed for defined contribution plans pulled back, by 11.1% to $31.9 billion in the year ended June 30. By comparison, real estate in defined contribution plans dropped 17.6% in the prior 12-month period after a 139% increase reflected in the 2018 survey results.

Once again MetLife Investment Management was the largest real estate manager by worldwide assets, with assets up 5.3% to $133.3 billion. PGIM Real Estate is second on the worldwide real estate manager list, with AUM rising 3.8% to $118.2 billion.

“This strong continued growth in AUM was concentrated in our commercial and agricultural mortgage investments, but we also still had healthy expansion in real estate equity investments,” Robert Merck, senior managing director and global head of real estate and agriculture at MetLife Investment Management, said in an email.

“(COVID-19) accelerated some long-term structural trends in a sector like retail, immediately increased demand in industrial, called into question the outlook for demand growth in office space, increased uncertainty around the trend toward urbanization and had numerous other material effects that had to be considered in updating appropriate investment strategy and portfolio positioning,” Mr. Merck said.

That said, opportunities for lending in commercial mortgages can be strongest during periods of uncertainty and stress, he added.

MetLife managed $107.8 billion in worldwide mortgage AUM as of June 30, up 4.7% from a year-earlier, and $250 million in loans, up 8.7%, as of June 30. MetLife also had $253 million in mortgages managed for U.S. institutional investors as of June 30, down 6.1% from the year-earlier survey. MetLife did not report loan assets for U.S. institutional clients.

“Loans originated on high-quality assets during periods of distress tend to have lower losses and also offer higher returns, as capital is in demand and sources are more scarce,” Mr. Merck said.

Nuveen LLC is once again first among real estate managers for U.S. tax-exempt institutions, as AUM increased 2.8% to $81 billion. PGIM retained the second spot with assets up 5% to $55.5 billion, while J.P. Morgan Asset Management is third, even with a 2.8% decline in AUM to $46.2 billion. Principal Real Estate Investors is fourth on the list with $24.6 billion in AUM, up 6%, switching places with UBS Asset Management, which now is in the fifth position with $23.8 billion, down 8.1%.

Carly Tripp, Charlotte, N.C.-based CIO, Americas at Nuveen Real Estate, said when the pandemic was in its early stages in March it was “really all hands on deck, hunker down crisis-management mode.”

She said there was very little information about real estate prices and how they would impact Nuveen’s real estate portfolio specifically and the commercial real estate business generally.

When Nuveen Real Estate executives flipped from crisis-management mode to getting back-to-business mode, it became more about assessing what markets and sectors would be affected the most and the long-term implications of the pandemic on real estate, she said.

Pre-pandemic, Nuveen had a focus on investing in niche sectors such as single-family rentals and medical offices, and consumer demand for those properties have accelerated with COVID-19, she said. People are moving out of urban centers to the Sun Belt. However, they are delaying buying homes and are renting longer, Ms. Tripp said.

When it comes to rent collection, there is a wide dispersion between sectors and locations, Ms. Tripp said. There’s been about 90% rent collection in industrial, multifamily and office. In retail, large-format retail malls are suffering, while necessity-based retail properties that are anchored by grocery stores or a Target or a Walmart have performed well, she said.

Even so, property performance varies from state to state.

“The most glaring dispersion is in retail,” Ms. Tripp said. In states that shut down stores earlier and for longer, there is less incentive for tenants to pay their rent, she said.

Eric Adler, London-based CEO of PGIM Real Estate, said that in 2018 and 2019 his team was evenly buying and selling properties.

“To us, we had the feeling it was late cycle,” Mr. Adler said.

They still found real estate to buy to fulfill their mandates, but at the same time PGIM executives were “taking money off the table,” Mr. Adler said.
From March to June, PGIM executives were still evenly buying and selling properties but transaction volumes had declined.

Deals continued in residential and industrial sectors but very little was happening in the market in the office and retail sectors in the three months ended June 30, Mr. Adler said.