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With recent market volatility and recession fears making smart money look for a landing spot, one option was private commercial real estate. Those investments are up 7.4% year-to-date through Sept. 30, according to an index that tracks the most commonly offered core private real estate funds.
The index’s administrator, the National Real Estate Investment Trust Council, said this growth rate is difficult to compare to the market because private investment often lags stocks and bonds. But overall, these funds are less susceptible to short-term trends in market volatility than exchange-traded real estate mutual funds, said Jeff Fisher, his Chicago-based NCREIF consultant. .
“Listed assets tend to have more noise and often tend to overreact,” said Fisher.
However, its steady growth can be difficult to access for the average investor, often with multi-million dollar investment thresholds, making it a popular choice among institutional investors such as pension plans, insurance companies and endowments. More common, says director Joe D’Alessandro. An overview of real estate performance measurement at NCRIEF. There are opportunities for retirement plan advisors to offer private real estate options for planning sponsors and participants via managed his accounts and eligible default investment options, according to industry insiders. It’s the place.
“With the evolution of production and changing regulations, the demand for alternative investments has increased significantly … then the headwinds of market volatility and high inflation make it even more attractive,” said the Institute’s president and CEO. CEO Anya Coverman said. For Portfolio Alternatives (IPAs). “Investor demand is very strong as real estate is a relatively stable asset class and offers diversification.”
A recent survey of 35 real estate investment firms found that about $80 billion of defined contribution capital is in private real estate, most of it through investment managers and only 11% through REITs. Led by the Defined Contribution Real Estate Council (DCREC), the study found that his DC real estate assets (AUM) under management increased steadily over his five years, during which he increased by 44%. .
Still, these findings represent only a fraction of the approximately $9.3 trillion invested in DC plans nationwide as of June 30, 2022. Up to this point, it has been heavily incorporated into the DC plan.
“Frankly, this is due to litigation and regulatory concerns,” she says. “We still have a lot of work to do.”
“Democratization” of real estate investment
The lack of acceptance of the plan, at least in recent times, is not due to a lack of product development by the industry. Client Capital Management Group’s Senior Vice President of Clarion Partners, which leads DC distribution He said in 2006, he had only four private real estate products available on the DC plan, according to Tripp Braillard. No, he’s 17 now.
For years, Braillard said, asset managers have been looking at ways to generate daily liquidity, daily trading and daily valuations for an asset class that is “essentially quarterly valued.” The industry has now agreed on standards for how it should work, and private real estate funds offered by Clarion and others “are trading like mutual funds,” he says. .
“It’s actually traded through the same plumbing as every other investment on the fund menu,” he says. , those barriers have been removed.”
Five years ago, Braillard said private real estate investment was only realistically available for DC plans of $1 billion or more, requiring related consulting and advice. Today, with the advancement and adoption of advisor-managed accounts, smaller DC plans can offer built-in services.
“We want to see access, down to the participant level, to private property, private real estate, and other diversifying types of assets that were previously available only to very large pension plans and ultra-wealthy families. “We’re going to do it,” says Braillard. “This is a great example of how we can democratize participants’ access to alternative investments.”
A hedge, or a grenade?
Large institutional investors such as defined benefit plans, university endowments and charitable foundations are already benefiting from private real estate, says Kevin of Groom Law Group, who advises clients on investing in retirement plans. Mr Walsh said.
“Why were Americans with 401(k) plans trying to save for retirement but no alternative investments available?” he says. Why not do with a 401(k) what already works?”
Walsh says there are fears of lawsuits over regulatory hurdles that have eased in recent years. Lawsuits have not only questioned even active investments, but also attacked passive funds for failing to meet their fiduciary duties.
“There was a time when people said that adding ortho to the retirement plan was like handing out a grenade to participants,” says Walsh. “Most people today believe that retirement plans with their fiduciary standards, long-term investment nature, and professional asset allocations such as managed accounts and target-date funds are unique opportunities that primarily offer private real estate options. It seems to be aware of offering .street investors.”
At a webinar addressing market turmoil held by Franklin Templeton on Wednesday, Tyne Bui, managing director of Clarion Partners, said real estate is a particularly good haven this year as a hedge against inflation.
“There are a lot of headwinds in the broader economy, but commercial real estate fundamentals are holding up pretty well,” Bui said. “Real estate has historically performed well during inflation and can be a good investment…although rents can offset rising costs and improvements in labor and capital are increasing each year. , the owner can pass on some of those costs to the tenant.”
Of course, fees are also a consideration when investing in alternative assets as they are often higher than other investment options. Annual fees for private real estate funds range from 80 to 120 basis points, said D’Alessandro of NCREIF. NCREIF’s D’Alessandro said: According to the latest data from the Investment Institute Company, this behaves similarly to equity mutual funds.
Clarion Partners, a subsidiary of Franklin Templeton, said it advises a number of funds, including a public real estate fund for individual investors called Clarion Partners Real Estate Income Fund (CPREX). . The investment manager also has a private placement, a collective fund of DC plans, but declined to provide names or details.
not pioneering
Drew Carrington, senior vice president and head of Institutional DC at Franklin Templeton, said in the current market environment, plan sponsors are taking a step back and considering what they have to offer participants. investment.
The problem is that many plan sponsors don’t want to be the first movers of new investment products, even if it brings stability.
“The DC community really hates being different or looking different,” says Carrington. “If I’m the first, I have to figure out the liquidity, I have to figure out the valuation, I have to figure out how to factor that into the plan.”
Now that many of these questions have been answered, Carrington says it’s important for advisors to show plan sponsors that models exist.
“The plan is already doing this,” he says. “Custodians, record keepers and project sponsors are already leading the way.”
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