Real Estate: Top Dog Among Alternative Mgrs.

ARLINGTON, VA—Real estate remains top dog among the top 100 alternative investment managers, who collectively manage more than $1 trillion in commercial property assets, or about one-third of these managers' $3.5 trillion assets under management worldwide in 2014, Towers Watson says in its annual Global Alternatives Survey.

Furthermore, there are 29 direct real estate funds managers in the top 100 ranking, more than any other asset class. Although real estate's total share of AUM falls to 23% when factoring in all 623 of the survey's respondents—who collectively managed $6.3 trillion globally as of this past Dec. 31—it remains the global leader among a number of investor types.

That includes pension funds, for whom direct real estate fund allocations represented 36% of the total $1.42 trillion in AUM by the top 100 alternative investment managers last year, or about $518 billion. Among asset types, the next-largest share for pension AUM comes from private equity funds of funds, ranking a distant second at $285.6 billion.

An even larger share on a percentage basis comes from insurance companies' alternative-asset allocations. Sixty-three percent of the $288.3 billion of insurance AUM handled by the top 25 alternative investment managers in '14 went to direct real estate funds.

Real estate also accounts for the largest share of sovereign wealth fund AUM by the top 25 alternatives managers, Towers Watson says. Of the $155.3 billion these managers oversaw last year, 35% went to real estate. Wealth management funds, too, favor real estate, with allocations to this asset class accounting for $244.2 billion of the $453.8 billion in AUM by the top 25 managers in '14.

“Institutional investors continue to invest capital in opportunities other than bonds and equities,” says Brad Morrow, head of investment manager research for the Americas at Towers Watson. “Lines are blurring between individual asset classes as investors focus more on underlying return drivers. Many asset managers in this area will continue to attract capital, and those that acknowledge the increasing sophistication of institutional buyers' approach and change accordingly will truly flourish.”

In many ways, Towers Watson says in a summary of the real estate sector, “it feels like 2007. Double digit returns, transaction volumes at multi-year highs, yields reaching multi-year lows, debt costs at ever lower levels on higher loan-to-value terms, regional (non-gateway) locations seeing increased investor interest, speculative development starting to re-emerge and fund raising breaking records in terms of speed and size.” With that said, the company notes that unlike eight years ago, “the property yield spread relative to long-term government bonds shows a healthy spread, which provides some investor comfort.”

Longer term, notwithstanding that favorable comparison to bonds, Towers Watson advises investors to be “more patient and selective when investing new real estate allocations at the current time. We have seen growing interest in co-investments, joint ventures and direct deals as investor aim to have more control and visibility on both assets and pricing.”

In addition, the company sees continuing growth in alternative property sectors “as investors better diversify their property allocations and take advantage of the thematic tailwinds associated with many of these subsectors.” Among these are student housing assets, which benefit from “growing emerging market wealth;” healthcare real estate, driven by demographics; and self-storage, driven by the urbanization trend.