S&P: Pension Funds Increase Real Estate Exposure

S&P Global Market Intelligence, New York, reported U.S. public pension funds are increasing their allocations to real estate as a hedge against volatile market conditions.

S&P examined the latest meeting minutes and investment reports of the 40 largest U.S. public pension schemes. It found increased real estate investment the most commonly cited change to investment strategy.

“The change is in part triggered by market volatility,” S&P said in U.S. Pension Funds Up Real Estate Exposure to Offset Rising Risks. “Of all alternative assets, real estate is the one most commonly used to hedge against inflation.”

Real asset prices tend to rise as inflation increases, S&P noted. Investors commonly use it portfolio diversification, with 76% of respondents saying they invested in real estate for this purpose.

The report noted both the California Public Employees’ Retirement System and the California State Teachers’ Retirement System increased their real estate allocations to nearly 15% from 13% over the past year. The Alaska Retirement Management Board’s also increased its real estate allocation target from 13% last year to 14% currently.

“Pension funds are increasingly eyeing the industrial segment of the asset class, which benefitted from the growth in e-commerce during the pandemic as demand for warehouses and last-mile delivery assets increased,” the report said. The California State Teachers’ Retirement System said strong demand for these facilities means the sector should reap long-term benefits.

Among the U.S. public pension funds making real estate investments in recent months: the New York State Common Retirement Fund, which invested $500 million in Blackstone Real Estate Partners X, and the Pennsylvania Public School Employees’ Retirement System, which made a $100 million commitment to EQT Exeter’s EQT Exeter Industrial Core-Plus Fund IV LP, S&P reported.

“As pension funds up their allocations to real estate, they are reducing the amount they invest in other asset classes,” S&P said. The analysis found that board members of the Pension Reserves Investment Management Board recommended a 1% increase in their private equity target and a 1% decrease in their global equities target as part of the company’s commitment to grow its private market allocation. CalPERS and CalSTRS both reduced their global equity allocation to 42% from 50% in late 2021 due to market volatility.