Limited partners, driven by pension funds and private wealth managers, are expected to invest more than $600 billion in real assets by 2027. Moreover, public pension funds are shifting a portion of their equity and fixed-income assets to private equity and real estate, according to a recently released 2023 study conducted by retirement & benefits services Milliman. The study tracks the funded status and other data of the largest 100 public pension plans in the U.S. 

Overall, public pension funds allocated 41% of their assets to stocks, 21% to bonds, and 34% to private equity and real estate. In the 2022 report (which covered data through June 2021), these figures were 46%, 22%, and 28%, respectively. Prior to 2023, these asset allocations remained quite stable. 

“From 2013 through 2022, the [public pension fund study] PPFS asset allocation was largely stable, but our 2023 study saw a noticeable move from equity and fixed income into private equity and real estate,” said Becky Sielman, co-author of Milliman’s PPFS. 

REITs 

Meanwhile, Nareit highlighted that pension plans have been bolstering their allocations to REITs, “particularly among the largest, most sophisticated plans.”  

As of January 2024, over 1,800 defined benefit (DB) pension plans with over $10 trillion in assets under management reported a real estate allocation, noted Nareit, citing data from Preqin. Of those plans, 733 DB pensions with total assets of more than $7 trillion included commitments to REITs. 

While total DB assets increased by about 19% over the last five years, total DB pension assets with REIT exposure increased by 37%, according to Nareit, resulting in an asset-weighted share of DB pensions using REITs in their real estate strategy of 69% in January 2024, up from 60% in January 2020. In January 2024, the share of DB pensions employing REITs in their real estate strategy remained relatively steady, rising to 41% from 39%. 

“While the share of all U.S. DB pension plans with REIT allocation is 41%, the share of U.S. DB pension plans with more than $50 billion of assets under management using REITs in their real estate strategy rises to 71%,” wrote Nareit’s VP, research, Nishi Mehta, and analyst, research & industry information, Nicole Funari. 

These findings are compatible with the 2023 Real Estate Allocations Monitor, a joint effort by Hodes Weill, an institutional real estate advisory firm, and Cornell University’s Baker Program in Real Estate. According to that study, 43% of U.S. institutional investors allocate funds to REITs. For U.S. institutions with more than $50 billion in assets the rate jumped to 65%. 

Nareit also noted that 69% of all DB pension real estate investors reported receiving part or all their exposure to real estate through REITs, with most of them investing in both REITs and private real estate. For DB pensions that invest in both public and private real estate, the allocations for the 5-year blended portfolio were 16% REITs and 84% private real estate. 

Overall Allocation 

In terms of broader real asset allocations among pension funds, approximately 33% of institutional investors now invest 10% to 20% of their total portfolios in the sector, according to a research paper, Real Assets Study, published by Aviva Investors, the global asset management business of Aviva plc. 

Despite the market’s massive repricing over the last 12 months, real estate equity remains the most appealing offer for investors, accounting for 27% of real asset portfolios on average, noted Daniel McHugh, CIO at Aviva Investors.   

Infrastructure debt (11%) and equity (14%) now account for a bigger part of real asset portfolios than in prior years, while real estate debt (11%) and long-term income (12%) have also increased since 2022. 

Furthermore, 51% believe that the potential of real assets to generate long-term income will become “increasingly important” during the next two years, with lower interest rates and thus less income from bond portfolios being a likely factor. 

Some notable pension fund moves over the past week include a $150 million commitment to real assets by the Illinois Municipal Retirement Fund. The pension fund earmarked $100 million to Starwood Capital Group for its 13th distressed opportunity fund, while $50 million was allocated to Grandview Partners towards its third flagship vehicle. 

The Virginia Retirement System committed $250 million to ACORE Credit Partners II, a closed-end fund that invests in newly issued mortgages secured by transitional commercial real estate.