Three Decades of Institutional Investment in Real Estate

with Alexander Carlo and Piet Eichholtz, Journal of Portfolio Management (2021)

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Alternative assets represent an increasing share of pension fund balance sheets all over the world, and real estate is a cornerstone of that allocation. This paper investigates the development in pension fund real estate investments over the last three 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 funds’ allocation to real estate differs across regions, with allocations increasing in Canada, stationary in the U.S., and shrinking in Europe. Just over 10% of the real estate exposure is through publicly listed vehicles. For the real estate portfolio as a whole, we observe a continuing increase in the use of external fund managers. Investment costs are stationary, with pension funds in the U.S. 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, we observe rather stable total returns for both private and listed real estate over the last three decades. Intermediated investment management for private real estate is costly, leading to disproportionately lower net returns.