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After Record Year, Pension Pledges May Ease - January 2016

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1) After Record Year, Pension Pledges May Ease Public pensions set another post-crash captured 67% of committed dollars, up record for equity commitments to real esfrom 62% last year. Core vehicles correPension Pledges ($Bil.) tate vehicles last year, but signs of a slowspondingly dipped to 33%, down from 38%. 46.2 down are emerging. However, Kessler said early indications are 39.5 Some 102 systems committed a total that core commitments will rise in the near 31.2 of $46.2 billion to commingled real estate term because of fears that it’s too late in the 27.8 24.1 funds and separate accounts in 2015, accycle to pursue riskier strategies. He noted cording to FPL Consulting. That was a 17% that Oregon Public Employees and Caliincrease from $39.5 billion in 2014 and fornia State Teachers, for example, upped 66% higher than the $27.8 billion tally in their core allocations in recent months. 2011 2012 2013 2014 2015 2013. Closed-end funds corralled half of comSource: FPL Consulting But the $8.2 billion fourth-quarter tally mitments last year, up from 47% in 2014. fell 35% from the average in the first three Open-end funds received 13% of pledges, quarters and 7% from the fourth quarter of up from 10% last. And commitments to 2014. separate accounts slipped to 38% from 42%. “That tells me that people are starting to get a lot more Vehicles targeting a single property type garnered 26% of cautious,” said Tim Kessler, principal of Chicago-based FPL. pledged dollars, down from 41% in 2014. Among those vehi“There’s still a lot of interest and demand for real estate, but cles, multi-family strategies captured the lion’s share of comthere are warning signs out there.” mitments — 40%, up from 25%. The rest went to the following Kessler cited several reasons why institutional investors categories: industrial (24%, up from 20%), retail (10%, down might slow commitments, including sky-high property valuafrom 28%), office (8%, down from 16%) and “niche,” such as tions, the recent stock-market decline and the prospect of risstudent and senior housing, medical office and storage facilities ing interest rates. (19%, from 12%). “I think you’re going to see a step back in 2016, to someVehicles focused on North America garnered 65% of pledgwhere in the $35 billion-to-$40 billion range,” he said. es, down from 72%. European funds dipped to 6%, from 8%. To be sure, interest in real estate remains high. London reAsian vehicles attracted 4% of commitments, down from 6%. search shop Preqin has reported that 78% of investors expect And funds investing globally captured the remaining 25%, up to commit the same amount or more to real estate this year. from 14%. As of September, institutional investors were shooting to have There were 470 total commitments last year, up from 416 in 9.6% of their assets in real estate on average, but had invested 2014, 386 in 2013 and 340 in 2012. The average commitment to only 8.5%, leaving significant additional investment capacity, separate accounts last year was $212 million, down from $274 according to a report by Cornell University’s Baker Program in million in 2014, and the average commitment to closed-end Real Estate and advisory shop Hodes Weill & Associates of New funds was $75 million, up from roughly $64 million the two York. The average allocation is expected to rise to 9.9% this previous years. year, the report said. FPL tracks 181 pension systems with $251 billion of real esWhile commitments climbed significantly last year, the bigtate assets and $3.3 trillion of total assets under management. gest investment managers benefited disproportionately. Five They are believed to represent the vast majority of assets held shops garnered a whopping 31% of the pledged dollars, up by public pension systems. The research firm began tracking from 21% for the top five in 2014. commitments in 2011, when the tally was $24.1 billion. It will Managers with value-added and opportunistic strategies release a report summarizing its findings this week.  REAL ESTATE ALERT: January 13, 2016, 5 Marine View Plaza, Suite 400, Hoboken NJ 07030. 201-659-1700