Completion Strategies for Real Estate

The largest institutional investors access core real estate through private investments — typically separate accounts or comingled funds. In most of the world, private real estate investment strategies have typically focused on major property sectors, such as office, retail, and industrial, with residential and hotel assets also included in core portfolios in some countries. Consequently, institutional investors often have little exposure to less traditional or niche property sectors.

In recent years, there has been a significant growth in the universe of niche property types as well as increased investor interest. Both the private and public real estate sectors have benefited from this trend, although it has been more pronounced in the publicly traded real estate universe. Returns of niche property types have been strong in both the public and private sectors, generally exceeding overall property indices over the past decade. Many of the niche sectors also out-performed traditional property types during the Global Financial Crisis (GFC) due to factors such as counter-cyclical demand drivers and/or limited supply due to fewer qualified developers.

Management of niche property types often requires specialized knowledge and resources, differing from typical core real estate investment and management practices. While there are qualified and experienced managers for privately held niche sectors, gaining access to these private operators and managers is typically difficult due to fewer options and smaller funds. Conversely, the opportunity set to access these niche property sectors in the public real estate securities universe is significantly larger and more available, while also offering some of the best in class operators in these property types.

As discussed in the full report, niche property sectors have become an increasingly significant component of the investment universe, putting most institutions in an underweight position relative to those sectors. Therefore, institutional investors should consider publicly traded real estate securities as an efficient means to “complete” their real estate allocations and help align the property type weightings with the true investable universe.