Institutional real estate can be classified as high-quality commercial properties such as office buildings, retail centers, industrial facilities, apartment complexes and hotels that are usually congregated in large investment portfolios managed professionally on behalf of third-party owners or beneficiaries. Return to top

Most investors in core properties (i.e. high-quality, stable, income-producing office, industrial, multifamily and retail properties) expect to receive around 8 percent to 9 percent on their unleveraged real estate investments. If they use leverage, they tend to leverage assets between 5 percent and 60 percent, with average portfolio leverage ranging between 20 percent and 40 percent. Leveraged return expectations for core real estate investments, therefore, range between 10 percent and 15 percent. Investors typically expect value-added investment returns of between 12 percent and 15 percent and opportunistic returns in excess of 18 percent to 20 percent.

Many of the larger investors have both core and high-yield investment components within their portfolios and, therefore, have different risk/return expectations depending upon the strategy for each portion of the portfolio. Some investors focus only on core strategies, others only on high-yield. Return to top

Institutional investors include public and corporate pension funds, endowments and foundations, life insurance companies, commercial banks, real estate investment trusts, and sovereign wealth funds, among other financial entities. Return to top

The commercial real estate marketplace in the United States currently is estimated at $4.0 trillion. The equity market capitalization of public real estate investment trusts (REITs) was approximately $408 billion at year-end 2011. Return to top

Pension portfolios for the most part consist primarily of stocks, bonds and money market instruments. Real estate and other assets, such as private equity or venture capital, play a relatively small role, primarily as a diversification tool. Allocations to real estate typically range between 5 percent and 10 percent. However, keep in mind that only a small percentage of U.S. plan sponsors invest in real estate because most plans are too small; of the approximately 70,000 plan sponsors in the United States, only an estimated 2,000 to 2,500 include real estate in their portfolio mix. Return to top

Traditionally, pension funds have viewed real estate as a relatively high income-producing asset class with equity characteristics, and underwriting has focused primarily on assessing the quality or sustainability of cash flow. During the past several years, many investors have been changing their perspectives, viewing real estate now as more of an equity asset class with better-than-average income characteristics.

As more and more pension funds begin to pay out more cash to beneficiaries (i.e. pensioners) than they are receiving in annual contributions, they can be expected to become much more income-oriented so that they will be in a better position to fund those negative cash flows without having to liquidate assets. Because of its inherent potential for generating relatively high cash distributions, we would expect pension funds to continue to view real estate as an income-producing asset with equity characteristics. Return to top

publications.irei.com/tirelrpt.html. Return to top

The most important trend in real estate portfolio management is an awareness that it exists as a profession, and that its practice is important. Most of the 1980s and 1990s were dedicated to the assembly of portfolios. While assembling portfolios is still a concern, especially with the global competition for good properties at attractive prices, the need to manage portfolios prudently also has become important. The primary role of a portfolio manager is to help define portfolio objectives, and then to construct and manage the portfolio so as to achieve those objectives at the lowest tolerable level of risk. Return to top

A portfolio manager is responsible for a portfolio of assets and typically operates for the benefit of a third party. Portfolio managers tend to operate at the strategic level, focusing on the development or clarification of portfolio risk and return objectives, on the construction and strategic management of portfolios, and on the monitoring of both market conditions and portfolio performance within the context of overall portfolio objectives.

Asset managers and property managers tend to focus more on tactics, i.e. on the implementation of portfolio strategy. Asset managers typically report to portfolio managers and work through third-party property managers, who report to the asset managers. Asset managers, therefore, are focused on managing collections of assets (as opposed to portfolios) and often are regionally focused. Their primary objective is to coordinate the activities of local property management personnel toward the achievement of the portfolio strategies established by the portfolio managers to whom they report.

Property managers typically are responsible for managing the day-to-day operations at the property level, either full-time on-site at one property or for a collection of properties within a specified submarket, market or region. Duties usually include leasing and property operations (maintenance, engineering, tenant relationships, on-site construction management, property-level accounting or data entry, and such). Property managers either report to portfolio managers (in vertically integrated companies) or to asset managers (in companies that are not vertically integrated). Return to top

Yes, definitely! While 10 years ago only a few tax-exempt investors had real estate investments overseas, today it is far more common. Interest in cross-border investing is increasing as institutional investors seek greater portfolio diversification and look to capitalize on the best risk-return opportunities. In the most recent annual U.S. plan sponsor survey conducted by Institutional Real Estate, Inc. and Kingsley Associates, Tax-Exempt Real Estate Investment 2012, investors indicated a notable increase in capital earmarked for foreign investments. While investors allocated 6.8 percent of new capital commitments for foreign investments in 2011, that figure was expected to increase to 10.4 percent in 2012. As investors become more comfortable with international investing and better understand the inherent risks, and as emerging markets such as Brazil and China exhibit greater transparency, cross-border capital flows should increase. Return to top

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Events 2015 Editorial Advisory Board Meeting — The Institutional Real Estate Letter — Europe September 16-18, 2015

Exclusive industry insight for tax-exempt investors pension funds, endowments and foundations

A monthly publication offering analysis of market trends related to pension fund investment in private equity real estate. It covers the