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Three Decades of Global Institutional Investment in Commercial Real Estate

Alexander Carlo, Piet Eichholtz and Nils Kok
The Journal of Portfolio Management Special Real Estate Issue 2021, 47 (10) 25-40; DOI: https://doi.org/10.3905/jpm.2021.1.275
Alexander Carlo
is a doctoral candidate at Maastricht University in Maastricht, The Netherlands
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Piet Eichholtz
is a professor of real estate finance at Maastricht University in Maastricht, The Netherlands
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Nils Kok
is a professor of real estate finance at Maastricht University in Maastricht, The Netherlands
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Abstract

Alternative assets represent an increasing share of pension fund assets, and real estate is a cornerstone of that allocation. This article investigates the trends in pension fund real estate investments over the past 3 decades, both in private and in public real estate, focusing on the performance of the asset class for the ultimate asset owners. The development of pension fund allocations to real estate differs across regions, with allocations increasing in Canada, stationary in the US, and shrinking in Europe. Slightly more than 10% of the real estate exposure is through publicly listed vehicles. Within the real estate portfolio, the authors observe a continuing increase in the use of external fund managers. Investment costs are stationary, with pension funds in the US structurally paying more to their external private real estate managers than their peers in Canada and Europe. Costs relating to public real estate are more equal across regions. In terms of performance, the authors observe rather stable total returns for both private and listed real estate over the past 3 decades, contrasting volatile performance of private equity and infrastructure. Intermediated investment management for private real estate is costly, leading to disproportionately lower net returns.

Key Findings

  • ▪ Current pension fund allocation to real estate is 8.3%, on average, with a 90/10 split between private real estate and public real estate.

  • ▪ Pension funds deploy a wide range of real estate allocation strategies, with intermediation growing in popularity over the past decades.

  • ▪ Real estate has provided stable returns over the past decades, with gross returns similar to stocks, and net returns in between bonds and stocks.

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The Journal of Portfolio Management: 47 (10)
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Vol. 47, Issue 10
Special Real Estate Issue 2021
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Three Decades of Global Institutional Investment in Commercial Real Estate
Alexander Carlo, Piet Eichholtz, Nils Kok
The Journal of Portfolio Management Sep 2021, 47 (10) 25-40; DOI: 10.3905/jpm.2021.1.275

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Three Decades of Global Institutional Investment in Commercial Real Estate
Alexander Carlo, Piet Eichholtz, Nils Kok
The Journal of Portfolio Management Sep 2021, 47 (10) 25-40; DOI: 10.3905/jpm.2021.1.275
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  • Article
    • Abstract
    • DATA ON GLOBAL PENSION FUND INVESTMENTS IN REAL ESTATE
    • REAL ESTATE INVESTMENT APPROACHES BY PENSION FUNDS
    • INVESTMENT COSTS
    • REAL ESTATE INVESTMENT PERFORMANCE FOR ASSET OWNERS
    • CONCLUSION AND IMPLICATIONS
    • ACKNOWLEDGMENTS
    • ENDNOTES
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