Real estate investments by Defined contribution (DC) plans are on the rise, according to a new survey of asset managers. The report, compiled by the Defined Contribution Real Estate Council (DCREC), NAREIM (a real estate investment association) and Ferguson Partners, found that with rising inflation, real estate is seen as an attractive alternative to other investments.
The 2022 survey included 35 real estate investment management companies representing approximately $80 billion in investments. The report says managers, consultants and plan sponsors are increasingly turning to real estate investments to diversify portfolios and hedge against inflation.
The findings support a January report from JP Morgan which has seen a “dramatic recovery” in investments by DC schemes. “After a year of rapid economic expansion fueled by historic levels of fiscal stimulus and accommodative monetary policy, inflation is rising in developed markets,” said the analysis from JP Morgan Asset Management. “Global investors, alert to the threat of rising interest rates, are increasingly focusing on real assets as alternative sources of yield and inflation protection.”
Growth options
As well as being increasingly accepted by investors, the plans now have more real estate investment options to consider, the report adds.
DC markets still make up a relatively small portion of the real estate market, the report notes, accounting for less than 5% of the market, but the number of options is growing. In the 2022 Survey of Real Estate Investment Managers, three-quarters of respondents said they already have a DC product, are actively developing one, or plan to develop a product for the DC market within two years.
“Amid post-COVID-19 market volatility and real estate outperformance, new and existing DC investors made new commitments to private real estate in 2021,” the report said. “In the past year alone, DCX real estate assets under management (AUM) have increased by 22.5% among these established managers.”
Outperform other asset classes
The study found that in 2021, real estate outperformed other asset classes, prompting further contributions. Private real estate has gained in importance due to its relative liquidity. Being able to manage cash quickly is fundamental to all DC real estate strategies, the report notes. “Even during times of normal economic activity, DC investors need to rebalance their portfolios. During greater or extreme economic activity, this need for rebalancing may increase.
Issues such as liquidity will continue to be front and center for investors as the market continues to develop, but DCREC officials said new strategies continue to come online.
“The industry has continued to evolve and establish ‘best practices’ to address issues such as liquidity and daily valuation, identified as concerns by survey participants,” said Jani Venter, Co-Chair of the DCREC. “We expect further growth in assets under management and products available in the future.”
Regardless of how strong the market has been lately; some uncertainty remains due to rising interest rates and the threat of recession. This analysis on the financial advisor’s website noted that the most resilient assets tend to be multi-family real estate assets.
“Despite the spike in inflation and rising interest rates, over the past year real estate investments have continued to produce stable and predictable income,” the article notes. “That said, some types of real estate are more vulnerable to inflation and rising interest rates than others, with multi-family assets in particular standing out. Characterized by short-term leases, or income-related rents, multifamily assets offer the highest level of inflation protection.
The analysis revealed that multi-family real estate assets are more resilient due to their tendency to have short-term leases. “This fundamental allows asset owners to quickly adjust rents to offset inflation and take advantage of increased demand,” the article said.