REITs post 22% growth over the year, outpacing real estate equity's gains

Real estate investment trust assets in the largest 200 U.S. retirement plans grew 22% to $34.2 billion in the year ended Sept. 30, and are starting to play catch up with those plans' less liquid, much larger real estate equity portfolios that grew 13.4% to $418.3 billion in the same period, results of Pensions & Investments' most recent annual survey show.

Indeed, over the five years ended Sept. 30, REITs also outpaced real estate equity, albeit from a much smaller basis, with assets up 47.4% compared to real estate equity's 40.5% increase.

Returns accounted for a portion of the increase. As of Sept. 30, the FTSE Nareit All Equity REIT index was 31.5% in the 12 months and 8.41% for five years, while the NCREIF Fund Index-Open End Diversified Core Equity index returned 13.54% for one year and 6.56% for five years.

Today, more than 60% of pension funds and endowments have REITs as part of their real estate strategy, said John Worth, executive vice president for research and investor outreach at Nareit, a Washington-based trade group.

Based on Preqin data, Nareit estimates that the asset-weighted share of U.S. defined benefit plans investing in REITs as part of their real estate allocation has grown to 67% as of Sept. 30 from 55% as of Sept. 30, 2016. Including endowments and foundations, REITs' share increases to 63% as of Sept. 30 from 51% on Sept. 30, 2016.

The California State Teachers' Retirement System, West Sacramento, the third largest defined benefit REIT investor on P&I's list, invests in them as part of its real estate portfolio. The $313.9 billion pension fund's REIT portfolio was up 14.3% to $3.2 billion as of Sept. 30 from $2.8 billion a year earlier, while its real estate equity portfolio grew 12% to $40 billion as of Sept. 30 from $35.7 billion a year earlier. CalSTRS began investing in REITs in 2019. It also has joint ventures with private and public REITs including a real estate debt joint venture with 3650 REIT, a private REIT.

The $496.8 billion California Public Employees' Retirement System, Sacramento, tops the REIT list with assets roughly flat from a year ago, at $6.5 billion. CalPERS is also in the first position on P&I's list of real estate equity managers with assets down 7% to $41.2 billion as of Sept. 30 from $44.4 billion as of Sept. 30, 2020.

CalPERS does not invest in REITs as part of its real estate portfolio, but rather gets its REIT exposure from its global equity portfolio. Most of its real estate equity portfolio is invested directly in properties or in separately managed accounts, a real estate report for the investment committee's Feb. 14 meeting showed.

The COVID-19 pandemic accelerated a theme that has been big among asset owners over the past year, Nareit's Mr. Worth said.

Institutional investors "are realizing that their (private) real estate portfolios are not capturing the entire breadth of the real estate footprint," according to Mr. Worth.

These asset owners are investing in REITs to get access to growing sectors such as data centers, logistics and cell phone towers, Mr. Worth said.

When CalSTRS first began investing in REITs in 2019, its director of real estate, Mike DiRe, said at the time that one use of REITs was to gain access to specialty sectors.