PLANSPONSOR - August/September 2019 - 59

Referencing their firm's surveys, Deloitte
consultants point to investors' interest in
emerging business models. About half of
these investors plan to invest in flexible
spaces and flexible leases, reflecting the
changing nature of work and tenant preferences,
the consultants say.
Across real estate classes, environmental
concerns are becoming part of
the investment equation, as operating big
buildings demands plenty of resources.
" We take ESG [environmental, social,
governance] and broader sustainability
factors into our real estate research
process, " reports Jon Pliner, U.S. head
of delegated portfolio management with
Willis Towers Watson, also in New York
City. " We talk to managers about how
they incorporate it into their investment
processes and valuation of properties. "
A rising number of U.S. public
pension plans incorporate ESG criteria
into their annual plan, says Faxon. " The
real estate asset class is often an important
contributor toward meeting [socially
beneficial] goals, as we can demonstrate
a reduced carbon footprint, local community
hiring and good governance, all in
tangible and transparent ways that other
asset classes cannot. "
Institutions have two broad options
for investing in real estate-direct real
estate, through private partnerships that
own the properties directly, or through
publicly traded real estate investment
trusts (REITs). While, over the long run,
both forms of investment achieve comparable
returns, the paths they follow can
substantially diverge.
The graph below illustrates the
differing volatility of publicly traded REIT
securities and direct investment in real
estate, with the Standard & Poor's (S&P)
500 added for comparison. The S&P 500
and publicly held REITs started to fall
sharply in 2007 and suffered large drawdowns
into the financial crisis.
Private real estate weakened as well
in 2008 but not as much as REITs, which
closely tracked the broad equity market. In
the period since, returns on public REITs
have been much more volatile than those
on private real estate, though both have
delivered nearly identical total returns.
" But REITs aren't a substitute for
direct real estate, " insists Faxon. " Investors
want direct real estate for the lack of correlation
to public equities and fixed income.
It provides something to DB plans that
REITs, with their volatility, cannot. "
Some investors see better value
in REITs, however. Dimensional Fund
Advisors (DFA), in Austin, is the largest
institutional manager of REIT funds,
offering institutions three primary ones,
as well as customized versions. DFA's
All Country Real Estate Fund returned
7.09% for the five years ended this June
30, beating the S&P Global REIT benchmark
by 1.80%. Excess return for 10 years
was comparable.
" REITs give investors a diversified
and liquid exposure to a multitude of
properties around the world, " says Savina
Roziva, co-head of research at DFA.
" There are over 400 REITs in 20 markets
around the world, providing exposure to
over 200,000 properties. That level of
diversification is difficult to achieve even
if an investor deploys a lot of capital. "
No matter what approach investors
take, observers agree that real estate is
near the end of a long, successful run.
" Real estate demand trends tend to lag the
national economy by just six to 12 months,
while real estate supply tends to be idiosyncratic
and driven by local factors such
as zoning and construction costs, " notes
Jacques Gordon, global head of research
and strategy with LaSalle Investment
Management in Chicago.
Faxon agrees: " The real estate cycle
has always been correlated with the
economic cycle, and there's never been a
time when real estate thrived during an
economic downturn. " -John Keefe
Value of $100 invested in December 2006
Indexes of publicly traded REIT securities (the FTSE/NAREIT All Equity REIT Index) and private direct real estate
(the NCREIF ODCE Closed-End Fund Index) versus the S&P 500
100
150
200
250
300
50
Source: eVestment
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
FTSE/NAREIT All Equity REIT NCREIF ODCE S&P 500
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