PENSION CONSULTANT SEES GROWING INTEREST IN PORTFOLIO COMPLETION STRATEGIES USING REITs February, 2021 by REIT Institute
Matt Ritter, senior research consultant for NEPC, joined guest host Meredith Despins, Nareit senior vice president, investment affairs, for a special edition of The REIT Report podcast to discuss how REIT-based investment can deliver access to a 21st century real estate portfolio.
NEPC is an independent investment consultant and private wealth advisor. Its clients—including public pensions, corporate pensions, endowments, foundations, health care groups, and private wealth—collectively represent approximately $1.1 trillion in total assets. Ritter is a member of NEPC's Real Assets Research Group and the Portfolio Construction Lead for the Real Assets Beta Group.
Speaking to the challenges clients are facing in their real estate portfolios today, Ritter noted that many clients—particularly those with net outflows—are seeking durable income and are asking “what's the future of my existing portfolio going to look like?” Historically, many institutional investors have accessed real estate through private markets, which focuses on the four main property types: Office, Apartments, Retail, and Industrial. “We're seeing a pretty wide range of returns and expectation by property type. This was a trend that was evident prior to the pandemic, but has really accelerated over the past year,” he observed. While some real estate sectors are facing headwinds, other property types—such as data centers, self-storage, and life science assets—are benefitting from strong demand tailwinds. Ritter noted that about half of the REIT market cap in the U.S. is already in these alternative property types, while “we're still many years away from having meaningful allocation in most private investments.” As a result, Ritter is seeing an increased interest in adding exposure to these alternative property types with REITs through portfolio completion strategies.
A portfolio completion strategy is a tool investors have to invest in property sectors, including new economy sectors, that complement the traditional real estate property types in order to achieve more robust diversification, boost portfolio investment returns, and dampen volatility. Today's REIT industry provides access to 21st century real estate sectors , including infrastructure, cell towers, data centers, and networked logistics properties that house the growing digital economy. One challenge investors may face when trying to implement a portfolio completion strategy is that it's a relatively new idea. “There's just not always as much long-term data to lean on,” Ritter noted.
He observed that allocations to REITs within pension portfolios has historically been relatively low, but that this may be changing. “We think that REITs present an opportunity to address some challenges that many investors may be facing in their real estate portfolios, most notably liquidity concerns and a desire to access some alternative property types that have long-term strong secular tailwinds.”