Institutional investors are increasingly looking towards niche or specialized property sectors to complement their real estate portfolios, according to panelists during the ‘Investors Activities Update’ session at Nareit’s REITworld: 2021 Annual Conference.
Nareit’s Meredith Despins, senior vice president of investment affairs & investor education, moderated the session with panelists Todd Kellenberger, client portfolio manager, real estate securities at Principal Real Estate Investors; Matt Ritter, senior research consultant at NEPC; and David Stafford, interim chief investment officer at City of Austin Employees’ Retirement System (COAERS).
The session kicked off with a discussion of how investors are thinking about the role of real estate in their portfolios today. All three panelists agreed that total return is still a top priority. Ritter observed that, with the recent focus on inflation, many clients are interested in the inflation hedging attributes of real estate.
Stafford noted that real estate tends to perform better during inflationary times, and it’s also important that real estate exposures are broadly diversified to capture the property types that are likely to do well in an inflationary environment. “I think that REITs and public markets offer an interesting avenue for gaining that exposure,” he added.
Panelists agreed that the overall appetite for real estate is still strong. However, “the appetite is not equal for all property types and all sectors,” Ritter said. There has also been a rise in thematic investing, observed Kellenberger.
As the conversation turned to the growing trend of utilizing REITs as part of a portfolio completion strategy, Stafford shared how COAERS added REITs to the pension’s investment strategy in 2019. At the time, the real estate exposure was made up of private real estate in core sectors. Guided by the boards’ investment beliefs and principles, they ultimately implemented a completion strategy with REITs. Their research found that there had been tremendous growth in various property sectors in recent decades, and that “over the last 15 years or so, a more diversified portfolio of REITs could have provided additional returns to the system to the tune of 150-200 basis points per annum.” COAERS worked with FTSE Nareit to develop a custom index, and partnered with Fidelity to implement.
The session wrapped up with panelists discussing the outlook for core real estate and developments that could be catalysts for change in how investors are deploying real estate capital.
Core real estate is evolving, and even funds that define themselves as core are changing, said Kellenberger. “One might argue that some of these more nontraditional sectors” are more stable, demonstrating characteristics of what is more broadly considered ‘core’ real estate.
Ritter agreed, adding that we’ve “already seen the private core market evolve and grow and shift to some of these more alternative sectors.”