Investing in Private Real Estate Through DC Plans
Historically, Defined Contribution (DC) plans provided participants with primarily publicly available investment options, such as equity and bonds. As DC plans become the dominant source of retirement savings for employees, plan fiduciaries may want to evaluate the benefits of providing access to private assets.
The value of DC assets invested in private real estate fund products in 2023, for example, was $36.4 billion, according to a survey led by the Defined Contribution Real Estate Council (DCREC).
The report indicated that 63.6% of asset managers experienced net inflows for the year, while 36.4% reported outflows. In contrast, inflows constituted 36.4%, and outflows accounted for 63.6% in 2022. Fund inflows predominantly originated from existing DC plan investors, while new investor contributions to dedicated DC private real estate funds decreased in 2023 to 0.3% from 9.4% of total inflows.
Greg Jenkins, co-president of the DCREC and the head of institutional defined contribution at Invesco, expressed his satisfaction with the overall inflows of capital during what he considered to be a difficult year for the private real estate industry, particularly for offices.
“We are starting to see renewed interest on the part of DC plans investing in the real estate market,” Jenkins said. “Sentiment is trending positively as interest rates begin to fall and we move further away from the pandemic.”
Along with the DCREC, the National Association of Real Estate Investment Managers, the National Council of Real Estate Investment Fiduciaries and the Pension Real Estate Association produced the report.
DCREC and the other survey sponsors promote private real estate exposure as advantageous for DC plan participants due to its diversification benefits and potential for enhanced returns.
Jenkins clarified, however, that the DC market drive is not intended to incorporate private assets as standalone investments, but rather as exposure to DC-friendly investment vehicles.
“It’s really about using them in target-date portfolios and managed accounts where these assets can really do good for participants in the long term,” he said. It was not surprising that there were fewer new adopters of private market investments in DC accounts, but he feels there is a favorable trend that will lead to more entrants in 2024.
“There are several managed account providers that are looking at alternatives and specifically private real estate because it has the precedents that some other investments don’t,” Jenkins said. “It’s often the first stop on the train that many people are thinking about when they are thinking about private markets.”
Invesco conducted a participant pulse survey in September and discovered that younger participants anticipate increased customization in their retirement investing. Jenkins suggests that this may indicate a desire for greater diversification through solutions such as managed accounts.
The survey revealed that 63% of Millennials desire their investments to be in accordance with their personal objectives, in contrast to 49% of Generation X and 42% of Baby Boomers. The firm conducted a survey of 583 participants in large DC plans.
The DCREC report found that, as of 2023, the typical real estate fund dedicated to DC investors held 85% of assets in private real estate, with 12% in listed real estate investment trusts, or REITs.
In terms of DC capital raising strategies, 63.6% of respondents have an in-house real estate team, while 36.4% have dedicated DC-focused capital raising within the real estate team. Meanwhile, 66.7% of respondents said investment vehicles have a liquidity cap, while 33.3% do not have one.
DC market products are not offered by all investment managers who are participating in the survey. In total, 45.8% of the participants are actively managing DC capital, 37.5% are contemplating the development of a product, 12.5% are actively developing an offer, and 4.2% have no intention of pursuing a DC offer.
The survey, which was conducted from May to July, was based on the responses of 24 real estate investment management firms that collectively manage over $1.5 trillion in assets. The most recent Investment Company Institute data indicates that the total DC plan assets in the United States are $11.3 trillion.
