Real Estate Continues to Draw Pension Funding

February 17, 2003 ( - Pension funds have allocated $14 billion to the US real estate equity market this year, according to LaSalle Investment Management.

And, in a break with tradition, they are prepared to leverage this year’s purchases as much as 25% to 50%, according to a report in the National Real Estate Investor.

If those commitments hold up, that would be an 8% increase from 2002 acquisitions, according to William Maher, director of North American investment strategy for Chicago-based LaSalle Investment Management, according to the report.

The average allocation to real estate across the whole plan sponsor community is still about 3%, John Hurley, managing director of Hartford-based TimesSquare Real Estate Investors, told PLAN SPONSOR last October.   “The range is 0% to 10%. Some plan sponsors are talking about going higher; although the traditional upper range has been 7% to 10%, but you don’t get the full benefit of diversification until you get to about 10%.”

Emerging Trends

“Emerging Trends in Real Estate,” an annual report prepared by Lend Lease Real Estate Investments and PricewaterhouseCoopers LLP, estimates that as of September 2002, pension funds owned $148.7 billion, or about 37%, of the $402.8 billion real estate equities market. Only real estate investment trusts (REITs), which accounted for about 42.5% of the total, command a larger share of the US real estate equity market.

The report cites information from the National Council of Real Estate Investment Fiduciaries (NCREIF) that says:

  • 41.5% of pension fund money currently is invested in the office sector
  • 19.6% is invested in the industrial sector
  • 18.5% in multifamily
  • 17.1% in retail
  • 3.4% in hotels

Of course, the biggest challenge for pension plans investing in real estate is not the difficulty in comparing products or even in the type of investment to make, but the fact that the assets are inherently illiquid.  

And, as noted in ” Fallout Shelter ” in last October’s PLAN SPONSOR , amidst the economic slowdown, there are new problems. Real estate, currently at the bottom of its cycle, is suffering from too much vacancy and declining revenues – at a time when a record low interest rate environment and a flood of capital looking for property has propped up prices.