Institutional investors are increasingly looking to blend listed and unlisted real estate strategies to complete their existing portfolios, Florence Chong writes
An Australian super fund has totally overhauled its property portfolio to include listed real estate investment trusts (REITs). In the process, the fund’s real estate portfolio is now more diverse in both sector types and geographies.
The fund, which chose to remain anonymous, worked with US manager PGIM to reshape its portfolio mix identifying “critical gaps” in both property types and geographies within its commercial real estate portfolio.
The upshot is what was an exclusively Australian portfolio with just three property types – unlisted office, retail and industrial – is now a diversified global REIT and direct property portfolio.
REITs have been innovators in terms of healthcare, data centres, telecommunications, cell towers and self-storage REITs in the US – John Worth, Nareit
Nareit, the Washington, DC–based-based industry body for REITs, has used the transformation of the Australian super fund portfolio as a case study to illustrate the changing mindsets among institutional investors in how they view the role of REITs in creating a rounded real estate portfolio.
“The portfolio that PGIM built for the Australian super fund gave it exposure to markets in the US, Canada and Europe in addition to its home market,” John Worth, Executive Vice President with Nareit, says.
Completing Existing Real Estate Portfolios
Under what is described as “completion strategy”, the new portfolio has been constructed to give it exposure to six new asset classes, such as multifamily and self-storage, which are emerging asset classes in Australia, but are well established in the US listed market. These asset classes have been chosen to enhance diversification, he told [i3] Insights.
PGIM has added the new sectors, such as digital infrastructure, which drives the modern economy, into the fund’s portfolio.
At 23 per cent, digital infrastructure, which includes data centres, makes up the fund’s biggest property weighting. In this more balanced and diverse portfolio, the other constituents in the index have weightings of 10 – 15 per cent.
The fund has retained its legacy assets in Australia – office, retail and industrial – which now makes up 18 per cent of the portfolio.
This super fund is probably the first in Australia to formally commission a global asset manager to reconstruct its real estate portfolio using the blended approach of combining listed and unlisted real estate.
Global managers are now actively promoting what they say is an emerging trend in managing real estate wholistically as an asset class. They say it is a more versatile and efficient way to manage their capital.
Adding REITs to Unlisted Asset Portfolios
The integration of REITs into traditional real estate portfolios provides an opportunity to bridge allocation gaps swiftly and strategically. This approach allows funds to diversify their holdings across various sectors, such as data centres, without the time-consuming process of acquiring physical assets.
[i3] Insights understands at least half a dozen super funds are evaluating the blended strategy.
Worth visited Sydney and Melbourne late last year and says: “Private real estate is focused on the traditional four industry types – and when we talk to institutions that is very much what we see in private real estate portfolios. On the other hand, REITs have been innovators in terms of healthcare, data centres, telecommunications, cell towers and self-storage REITs in the US.”
In 2023, GIC and investment manager, DWS, published a paper specifically looking at the merits of including listed real estate in a property portfolio.
Whatever you want to accomplish in your property portfolio there is probably a REIT strategy that can help you accomplish that – John Worth, Nareit
Worth recalls that he key point is that over the long term the correlation between REITs and private real estate is very high. And that both REITs and private real estate deliver real estate returns, and that investors who have a reasonably long-time horizon should really think of combining public and private real estate in their portfolio.
He says investors adopt the approach that best suited to their needs. “Whatever you want to accomplish in your property portfolio there is probably a REIT strategy that can help you accomplish that.”
The idea of combining public and private real estate is gaining traction, Abhi Shroff, Head of Institutional business, Asia Pacific at Cohen & Steer, says.
“Australian super funds are expanding with an ever-increasing pool of capital to invest. If a fund allocates 10 per cent to real estate and it has grown from $100 billion to $150 billion, it needs to invest an additional $5 billion. Its preference is to invest in direct property – that is generally the priority of Australian super funds – but there is invariably a gap in terms of allocation.”
Super funds can use REITs to “complete” their portfolio and rebalance where there is too much allocation to certain sectors. If they want to put more capital into other sectors, like data centres, the quickest way to do that is through REITs, says Shroff as it takes time to access data centres in the private market.
Tactical Arbitrage Opportunities in REIT Price Dislocations
Superannuation funds have long separated listed and unlisted property as two distinct asset classes. When they do invest in REITs, the asset can come under equities teams, which are experienced in dealing with share market volatility. Some super funds do manage REITs within their real estate portfolio given the underlying real estate assets.
He says investing in REITs requires different analysis and skillsets such as dedicated analysts and tools, which can be lacking within the in-house asset management teams at super funds.
Shroff notices some funds in Australia have no allocations to REITs at all, preferring to put their real estate allocation in direct property either managing internally or through private funds.
Among its peers, UniSuper stands out as being an early adopter of the blended approach and has moved seamlessly between listed and unlisted assets out of a single bucket of capital to enhance portfolio performance and liquidity.
If a fund allocates 10 per cent to real estate and it has grown from $100 billion to $150 billion, it needs to invest an additional $5 billion. Its preference is to invest in direct property – that is generally the priority of Australian super funds – but there is invariably a gap in terms of allocation – Abhi Shroff, Cohen & Steer
A fund spokesperson told [i3] Insights: “UniSuper’s property portfolio comprises directly owned investments across high quality retail, logistics and commercial office, pooled investments, and listed global and domestic property securities (REITs). We have taken this approach for over 20 years.”
As 31 December 2024 UniSuper had over $8 billion in unlisted property including more than $5 billion in directly owned investments. Additionally, its REITs portfolio is A$1.6 billion.
But newcomers to the strategy will need professional guidance to successfully adopt the blended approach.
Shroff says this is the reason that Cohen & Steers recently launched a hybrid model to allow pension funds to invest in private and public real estate with room for doing tactical allocation when there is dislocation in the REITs market.
For example, data centre REITs in the US were down 28 per cent in 2022, though rebounded strongly in 2023 gaining 30.1 per cent and again in 2024 gaining 25.2 per cent.
The tactical arbitrage opportunity was one of the key findings of the GIC-DWS study because private and listed real estate valuations can diverge in the short-term, often leading to large premiums or discounts to REIT net asset value.
The study concludes that the combination of private real estate and REIT is a “powerful tool for customising real estate allocations”.
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[i3] Insights is the official educational bulletin of the Investment Innovation Institute [i3]. It covers major trends and innovations in institutional investing, providing independent and thought-provoking content about pension funds, insurance companies and sovereign wealth funds across the globe.