Real Estate as an Investment Vehicle – Large Institutions
- At $32 Trillion in Total Value, Real Estate is the largest single asset class and source of wealth in the United States.
- Commercial Real Estate (CRE) is well suited to provide reliable and predictable cash flows.
- Real Estate, especially CRE, can be an excellent hedge against inflation
- Numerous investment channels such as REITs, CMBS, Private Equity, Private & Public Debt
Pension fund managers are obliged to provide a reliable source of investment returns to the constituents who rely upon the fund’s success for their living expenses. Often, those who rely on the income supplied by their pension investment have very few alternative means of paying their living and entertainment expenses. As such, it is important that their pension fund delivers consistent and reliable investment yields. Enter, real estate as an investment vehicle.
At an estimated $32 Trillion in total value, real estate is the largest single asset class and source of wealth in the United States. This is in large part due to its attractiveness to tenants and principles, alike. Most US Businesses find it to be more profitable for them to lease as opposed to owning the buildings in which they operate. This dynamic creates a large market for leasable real estate, on both the lessor and lessee part, and an opportunity for investors and developers of real estate to bring a product to market with high demand.
Pension funds have found private equity real estate to be a reliable and diversified source of income from cash flows (leasing) as well as a relatively predictable source of residual profit due to predictable terminal cap rates (relative to other investment decisions). Private equity real estate investments, properly managed, can exceed general market returns through capital improvements, leasing practices, finance vehicles, and increased residual profits due to the inflation of market value or shrinking of market cap rates from competition.
Further, institutional investors with large capital funds are highly motivated to find hedges against currency inflation. The last thing the fund needs is/are for their funds to be decreasing in value because of rapid price and currency inflation. Price bumps are negotiated into commercial lease agreements to offset inflation. Tenant responsibility for certain operating expenses can help to be an offset on currency inflation. Consequently, CRE investments can be a nice shelter from inflation for the institutional investor.
Private equity real estate investments are not the only way in which a pension fund can enter the real estate investment game. Additionally, they can work with real estate investment vehicles, which are more liquid, such as Public Equity (REIT – Real Estate Investment Trust) investments and Public Debt (CMBS – Commercial-Mortgage Backed Securities) investments. These investment vehicles do not necessitate activate management by the Pension Fund, and can be easily traded on the public market.
Pension funds, and other large institutions, are attracted to commercial real estate because of predictable cash flows, healthy residual, a hedge against inflation, and the diversification options in public debt, private debt, public equity, and private equity interests.
Should you, or anyone that you know, have any questions related to this post, please do not hesitate to reach out via text, email, or phone. I am passionate about helping others along their real estate journey.
— Nick Schlekeway