The Defined Contribution Real Estate Council (DCREC)
launched a podcast series aimed at educating plan sponsors and advisers about the
potential benefits and risks of using commercial real estate investments.
The first two podcasts in the series are available now and
feature David Skinner, portfolio manager and head of the defined contribution practice
at Prudential Real Estate Investors (also a former co-president of DCREC).
According to Skinner, adding commercial real estate to a portfolio can bring
improved diversification, stronger risk-adjusted returns and lower overall correlation
to stocks and bonds. Skinner suggests commercial real estate also has the ability to
generate income and act as a potential inflation hedge in the defined contribution
(DC) plan context.
Like investing in individual stocks, bonds or mutual funds,
investing directly in commercial real estate requires no small amount of financial
savvy and sophistication, Skinner says. So it is likely commercial real estate
investments will do the best for DC plan participants when integrated into some
type of asset allocation solution.
Skinner says he often hears questions from plan sponsors and
advisers to the effect of, “Why real estate and why now?” He notes that DCREC also fields questions about potential liquidity and fee issues that are important to DC plan fiduciaries.
“First off, there is an investment universe of $31 trillion
dollars in commercial real estate currently,” Skinner observes, so it’s not a
new or untested area of investment, despite the fact that many plan sponsors
and even advisers have probably not really considered real estate in the DC
context. “It’s the third largest asset class behind stocks and bonds,” he adds,
“so just looking at the size and range of investment opportunities in the space
both in the U.S. and globally, it’s a compelling area for investing.”
Beyond this, the last 50 years have seen major institutional market participants, including state and municipal pension plans,
large corporate pension plans, union pension plans, endowments and foundations all integrate real estate investments into their portfolios—many to a significant degree of their overall holdings.
“All these institutional investors have already pushed into
real estate in a big way,” Skinner says, so the DC space is actually having to catch up in this exciting area, not least because over time the risk-adjusted
returns from commercial real estate investing have proven to be strong.
Next: What are the
economic benefits of real estate in DC?