Real estate managers notched solid overall asset gains during 2015, but at a much slower growth rate than a year earlier.
Pensions & Investments’ annual survey of money managers found real estate equity assets under management totaled $385.4 billion at the end of 2015, a gain of 3.3%, while timber assets under management at year-end 2015 were up 8.6%, to $15.3 billion. Real estate investment trusts, meanwhile, rose 5.4% to $85 billion.
But just a year earlier, P&I’s universe of the largest managers of U.S. institutional tax-exempt assets showed gains of 24.5% for equity real estate and 18% for REITs. Timber in 2014 dipped 2.7%.
“We are still seeing interest in real estate,” said Brad Morrow, head of manager research in the Americas in the New York office of consulting firm Willis Towers Watson PLC.
The bulk of Wills Towers Watson clients are still mostly investing in core and core-plus strategies, he said.
The stock market correction last year affected institutional investors’ real estate investments because of the denominator effect, said David Doupe, managing director and international director of national investor accounts for Jones Lang LaSalle Inc., based in the El Segundo, Calif., office. The drop in investors’ equity portfolios caused them to be overallocated to other asset classes including real estate.
As a result, some investors sought redemptions from their open end funds, Mr. Doupe explained.
Among real estate equity managers, the largest 25 account for 88% of total real estate assets reported at year-end 2015, a bump up from 85% a year earlier.
Domestic real estate equity assets among the largest 25 managers grew 6.4% to $297.9 billion, while international real estate dropped 5% to $36.7 billion. The year before, domestic real estate was up 17.4% and international real estate equity assets rose 124%. A strong U.S. dollar combined with asset sales and investor preference for U.S. real estate led to these asset swings, managers and others said.
Timber assets of the 25 real estate equity managers were up 1.7% to $6 billion, following 2014’s doubling of timber assets after two down years in 2013 and 2012.
Real estate investment trust assets overall grew 5.4% to $85 billion; the total of the largest 25 managers of REIT assets for U.S. institutional tax-exempt clients was up 6.6% to $82.3 billion.
Real estate and REIT managers’ portfolios also got a boost from returns.
The NCREIF Property index return for 2015 was 13.33%, with 5.01% from income and 8.03% from appreciation; the net return of the NCREIF Fund Index-Open End Diversified Core Equity was 13.96%. The NCREIF Timberland index was 4.97%; 2.67% from income and 2.25% appreciation.
By comparison, the total return of the FTSE NAREIT All Equity REITs index was up 2.83% for the year ended Dec. 31. The FTSE NAREIT Mortgage REITs index was down 8.88% and the FTSE NAREIT Composite REITs index, which is the sum of the constituents of the other two indexes, was up 2.05%.
Calvin Schnure, senior vice president, research and economic analysis of the Washington-based National Association of Real Estate Investment Trusts, said NAREIT data found the value of REIT assets under management increased 5.4%, substantially more than REIT returns.
Last year was a challenging year for the broader markets, and while REITs had their ups and downs, they ended up with a small positive return, he said.
“REITs got the sniffles” from problems of the overall stock market, Mr. Schnure said.
However, overall real estate sector fundamentals are better than the entire economy, he said: “New supply is not keeping up with the growth of demand” for real estate.
Growth of managers’ REIT assets under management was stilted by a pickup in REIT consolidations and take-private transactions in 2015, said Jones Lang LaSalle’s Mr. Doupe said.
More REITs were taken private, often by private equity firms, and that occurs “when we are getting near to the more mature parts of the real estate cycle,” Mr. Doupe said. As for real estate equity, transaction volume in 2015 was close to the peak of the last cycle in 2007, he said.
“I will tell you that the first half of last year was really hot in terms of total transactions over 2014 … The second half was down from that. There was a little anxiety in the system between dropping oil, (and) China,” Mr. Doupe said. “None of those things relate to real estate but it (the sentiment) muted a little bit of transaction activity.”
P&I‘s data on individual asset classes and strategies are based on assets managed internally for U.S. institutional tax-exempt investors as of Dec. 31.
Retains top rank
TIAA Global Asset Management retained the top rank among real estate equity managers, with
J.P. Morgan Asset Management (JPM) and
Prudential Financial holding onto the second and third positions, respectively.
All three managers’ real estate equity assets under management grew in the year ended Dec. 31. TIAA Global Asset Management’s real estate equity assets rose 22% to $58.6 billion;
J.P. Morgan Asset Management’s assets gained 16.5% to $38.6 billion; and
Prudential Financial’s assets increased 13.6% to $30 billion.
Chris McGibbon, TIAA’s managing director and head of real estate for the Americas in Charlotte, N.C., attributed the increase in the firm’s real estate assets to “our continued investment in all major commercial real estate sectors on a global basis.”
Even though valuations were high, TIAA executives have “continued to invest strategically in markets which offer relative value,” Mr. McGibbon said.
In 2015, TIAA launched a number of strategies both in the U.S. and Europe, he said. “We are currently focusing on workforce multifamily, superregional malls and industrial investments, and are seeing strong interest in these sector-focused strategies.”
J.P. Morgan Asset Management, ”our real estate assets (in 2015) grew from a combination of client demand and asset appreciation as real estate continued to produce outsized returns,” said Joseph Azelby, the firm’s New York-based head of global real assets.
JPMAM’s international real estate assets rose 31% to $739 million in 2015, while domestic real estate assets rose 16% to $37.8 billion. “The international AUM swings were primarily driven by a large asset sale and the acquisition of an Asia-Pacific real estate platform,” Mr. Azelby said.
J.P. Morgan Asset Management’s December 2014 acquisition of Aviva PLC’s real estate investment business with properties in Australia, Japan and Singapore boosted its international real estate portfolio, he said.
TIAA’s REIT assets grew 177% to $10.2 billion last year, partly due to a reporting change.
Morgan Stanley’s REIT assets dropped 6.6% to $8.9 billion and
BlackRock’s assets dipped 4.3% to $6.4 billion.
This article originally appeared in the May 30, 2016 print issue as, “Firms see solid but not spectacular growth in year”.