What appears to be an emerging trend – combining listed and unlisted real estate within a single portfolio – has, in fact, long been a strategy adopted by a handful of global pension funds and their managers, Florence Chong writes.
In Europe, APG, PGGM, and Norges Bank Investment Management (NBIM), which manages the Government Pension Fund Global (Norway’s oil fund), are well-versed in the approach. In the US, real estate investment trusts (REITs) are a common choice among real estate investors.
These global investors have split their real estate portfolios almost equally between private real estate and REITS.
NBIM made a strategic move in 2019 to disband its direct real estate investment unit, Norges Bank Real Estate Management, and to pursue a combined listed and unlisted strategy.
As part of this strategic shift, the Norwegian sovereign wealth fund now has equal weighting to both private and listed REITs. In a case study published by Nareit, the Washington-based industry body for REITs, NBIM real estate assets under management totalled US$58 billion (A$89bn) as of December 31, 2023.
The exercise allowed the fund to optimise cost management and, critically, create a portfolio that improves the fund’s sector diversification and its overall risk-return profile.
NBIM’s real estate allocation currently sits at around four to five per cent, but it plans to increase it to up to seven per cent, John Worth, Executive Vice President of Research and Investor Outreach at Nareit, told [i3] Insights.
“The Norges view is that you have to manage the real estate portfolio from the bottom up. They don’t start by deciding to allocate a specific percentage to REITs versus private real estate. Instead, they begin by identifying the property sectors and geographies they want exposure to and then determine the best way to gain that exposure,” Worth said.
“If private real estate offers the best option, they go that route; if REITs do, they choose REITs. Interestingly, by not setting REIT and private real estate allocations upfront, they’ve ended up with something close to a 50-50 split.
“However, the sectors differ: in the private market, they’re getting office, logistics, and some retail, whereas through REITs they’re accessing data centres, healthcare, self-storage, residential, and life sciences. They are really focusing on where they can find the best opportunities —superior operational performance, high-quality assets, and favourable valuations.”
Worth believes this is an approach more investors will adopt in the future because it simply makes sense. At its core, it is about picking the best structure, and where the investor can best execute its real estate strategy.
Dutch Pensions Funds are Early Adopters of Blended Approach
Dutch pension fund managers, APG and PGGM, are earlier adopters of the blended approach. They began using a combined portfolio more than a decade ago.
PGGM which manages €261 billion has a 10 per cent allocation to real estate, and the portfolio is equally split between listed and unlisted real estate. It sees the blended approach as the best way to tap into the complementarity of the private and public sectors.
Currently, PGGM has 65 per cent of its listed property securities in the US, 23 per cent in Asia-Pacific, and 12 per cent in the developed markets of Europe. Its weighting reflects the global market capitalisation split among these three key regions.
APG manages €616 billion on behalf of several pension funds, including ABP (the pension fund for the government and education sector), bpfBOUW (for the construction sector), and SPW (for Dutch housing associations). The portfolio has a 10 per cent allocation to real estate, of which 40 per cent is invested in listed REITs, according to Rutger van der Lubbe, Head of Global Investment Strategy at APG Asset Management.
We believe that integrating our listed and private real estate teams maximizes information sharing and leads to better investment decision-making across ABP’s real estate mandate – Rutger van der Lubbe, APG Asset Management
“APG sees several compelling reasons to include public real estate alongside private real estate. These include, but are not limited to, a broader investment opportunity set and greater flexibility to adjust portfolio composition when rebalancing is required,” Van der Lubbe told [i3] Insights.
“Most importantly, we believe that integrating our listed and private real estate teams maximizes information sharing and leads to better investment decision-making across ABP’s real estate mandate.”
When used as a tactical strategy, it can deliver additional alpha. The Teacher Retirement System of Texas (TRS) invested US$400 million into public REITs between 2021 and 2023 at a time when the market had collapsed post pandemic. The investment yielded a 17.1 per cent internal rate of return, with US$47 million in profit—significantly outperforming the TRS Open-End Core Equity private real estate benchmark, which would have otherwise yielded a loss of more than 10 per cent.
The US$200 billion TRS has a 15 per cent allocation to real estate. Historically, the fund invested mainly in private real estate but used REITs tactically to capitalise on the divergence between public and private real estate valuations, such as in 2022–23.
Growing Interest in REITs from Asian Funds
In Asia, Korea’s National Pension Service (NPS) and Singapore’s GIC have investments in listed real estate.
NPS has issued three separate mandates to global managers to invest in listed REITs as part of its broader real estate exposure. Most recently, in 2023, it launched what it describes as the world’s first specialty property index for listed niche and non-core real estate.
NPS, which oversees KRW1,213 trillion (A$1.3 trillion) in assets, worked with FTSE Russell, Nareit, and the European Public Real Estate Association to develop the index. It allocated US$1 billion to this benchmark, which is designed to complement a real estate portfolio predominantly composed of traditional property types such as offices and retail.
Importantly, it has been structured to “unlock” non-core sectors such as data centres, self-storage, senior care, life sciences, timber, single-family and manufactured housing, medical office buildings, and student housing.
NPS views the index as part of its “portfolio completion strategy.” The index’s initial constituents comprise 70 stocks across 10 countries, including the US, the UK, Australia, Belgium, Canada, and Singapore. NPS said the index is currently being offered to other institutional investors alongside its own investment.
Interestingly, by not setting REIT and private real estate allocations upfront, [Norges Bank] ended up with something close to a 50-50 split – John Worth, Nareit
It has also twice mandated Seattle-based Russell Investments to manage global real estate securities. Under its two Global Real Estate Securities mandates, NPS has entrusted Russell Investments with US$1 billion each time to seek opportunities in the listed market.
The second mandate, issued in December 2020, was designed to take advantage of tactical opportunities — most of the commitments were made following market downturns.
REITs form the “fourth quadrant” of GIC’s real estate strategy. In the Singapore sovereign wealth fund’s asset mix, real estate represents 13 per cent, but how much of that is in listed real estate is not disclosed.
Abhi Shroff, Head of Asia-Pacific Institutional Distribution at Cohen & Steers, said he has met with a range of pension funds across the region that are showing more interest in REITs and are looking for information about the asset class.
Several large pensions in Asia already allocate to REITs within their real estate portfolio, and more are considering for reasons such as liquidity, diversification and returns
Traditionally, most APAC pension funds’ exposure to REITs has come via their equities allocations through indices like MSCI World, which typically include two to three per cent in real estate.
While most institutions in Asia already view real estate as an asset class, they are likely to broaden their allocation to include REITs in a combined private/listed strategy in future, Shroff says.
__________
[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.