REITs can help provide access to the new economy sectors—such as cell towers, data centers, and networked logistics properties—that complement the traditional real estate property types, according to Todd Kellenberger, client portfolio manager, real estate securities at Principal Real Estate Investors. Kellenberger noted that the idea of using REITs to gain access to these new economy sectors as part of a portfolio completion strategy has garnered increased attention from institutional investor clients recently. Kellenberger joined guest host Meredith Despins, Nareit’s senior vice president, investment affairs, for a special edition of The REIT Report podcast to discuss the role REITs can play in building a successful 21st century real estate investment portfolio.
Principal Real Estate Investors manages $96 billion in assets today, with $25 billion invested in REITs. The firm recently launched the Global REIT Structural Opportunity Strategy, based on the idea that the way people use and interact with real estate is shifting.
“Certain sectors and companies will experience demand driven higher from those structural forces, and others will be disrupted,” Kellenberger said.
Looking at how property sectors have evolved and performed in recent years, structural factors have played a key role, he emphasized. From the rise of work-from-home to the growth of e-commerce, many new economy sectors have the “tailwind of secular change in demand behind them.”
“Institutional clients often need an index to measure risk and our value add as an active manager, and we were able to create a custom version of the FTSE EPRA Nareit Extended Index to build a benchmark that was a good proxy for the strategy.” Given the liquidity of REITs, Kellenberger said that investors can be more intentional in where they allocate capital while creating a well-rounded, diversified real estate portfolio for clients.
When asked how investors are viewing the role of real estate in their portfolios today, Kellenberger identified three key themes:
- Investors are under-allocated to real estate as part of their broader asset allocation plan, and they’re valuing the liquidity of REITs in a fast-moving market.
- Investors are looking for higher relative yields and returns in a world of low rates, while maintaining a positive view on the real estate cycle and growth.
- Being prepared for a possible increase in inflation is a priority, with many investors looking at shortening lease duration or turning to structurally-driven REIT sectors.
“COVID froze property markets as transactions and capital flows came to an abrupt halt in early 2020. A priority is getting money put to work, and in the past 12 months, we could speak from experience that investors are utilizing public REITs to do just that,” Kellenberger said.
Investing involves risk, including possible loss of principal. Potential investors should be aware of the risks inherent to owning and investing in real estate, including value fluctuations, capital market pricing volatility, liquidity risks, leverage, credit risk, occupancy risk, and legal risk.
Principal Real Estate Investors is a dedicated real estate investment management group within Principal Global Investors. Principal Global Investors leads global asset management at Principal®. Principal, Principal and symbol design and Principal Financial Group are trademarks and service marks of Principal Financial Services, Inc., a member of the Principal Financial Group.