According to an analysis by S&P Global Market Intelligence, US public pension funds are increasing their allocations to real estate to protect against volatile market conditions.
A review of the latest meeting minutes and investment reports from the 40 largest U.S. public pension plans in June found that increasing real estate investment was the most commonly cited change in investment strategy.
The change is partly triggered by market volatility. Of all the alternative assets, real estate is the one most commonly used to hedge against inflation, according to a Preqin survey of institutional investors. Real asset prices tend to rise as inflation rises. It is also the most used asset class for portfolio diversification, with 76% of respondents saying they have invested in real estate for this purpose.
The California Public Employees Retirement System and the California State Teachers Retirement System both increased their target allocations to real assets to about 15% from 13% last year, according to reports from their committee. November 2021 investment plan. The Alaska Retirement Management Board also increased its target allocation to the asset class to 14% from 13%, according to a comparison of its 2021 and 2022 investment reports.
Pension funds are increasingly eyeing the industrial segment of the asset class, which has benefited from the growth of e-commerce during the pandemic as demand for warehouses and last-mile delivery assets has increased. Strong demand for these facilities means the industry should reap long-term benefits, according to STRS Ohio. Report of June 16, 2022. Both the State Board of Administration of Floridas June 28, 2022, report and ARM of February 15, 2022, report also indicates that the industrial sector will compensate for the weaker segments of the market such as office and retail.
Among the U.S. public pension funds that have made real estate investments in recent months are the New York State Common Retirement Fund, which pledged $500 million to Blackstone Real Estate Partners X (LUX) SCSp on 30 June ; Baltimore City Fire and Police Employees Retirement System, including the Board of Directors approved a $20 million investment in IPI Partners Fund III, managed by IPI Partners LLC; and the Pennsylvania Public Schools Employee Retirement System, which has committed $100 million to EQT Exeter’s EQT Exeter Industrial Core-Plus Fund IV LP.
As pension funds increase their allocations to real estate, they are reducing the amount they invest in other asset classes. Market Intelligence analysis found that board members of the Pension Reserves Investment Management Board recommended increasing their private equity target by 1% and decreasing their global equity target by 1% as part of the company’s commitment to increase its private market allocation. CalPERS and CalSTRS reduced their allocation to global equities at 42% from 50% in November 2021 in response to market volatility.