By Muskan Arora

Real estate has dragged some portfolio returns down, but one fund found a winning strategy.

Multiple pension plans, including the $105.3bn Massachusetts Pension Reserves Investment Management Board, noted a downfall in the fiscal year returns, due to the poor performance of RE. Massachusetts was down 6%.

The $56.8bn Connecticut Retirement Plans
& Trust Funds’ low returns were driven by its real estate portfolio at
-4.8%, followed by risk mitigating strategies at 0.9%.The fund returned a net 11.5% for the fiscal
year ended June 30, below its benchmark of 12.9%.

Similarly, $24.3bn LACERS saw their lowest returned in RE at -8.1% for the asset class,  however outperforming their benchmark of -8.5% for real estate within their portfolio. The $22.8bn Oklahoma Teachers’ Retirement System had a
negative real estate return of -9.3%, outperforming its real estate benchmark of -11.5%.

In contrast, the
$75.2bn PennPSERS had a positive net RE return at 8.9% for the fiscal year
ended June 30. 

In today’s market environment, real estate credit is more favorable as compared to real estate equity, which has allowed multiple investors to enter the space.

“As we think about the future of the private credit portfolio, we’re excited about adding more hard asset collateral, that means loans on real estate or infrastructure investments,” said Sean T. Sarraf and Jarrett Richards, portfolio managers at PSERS.

“Since the Fed began raising rates in 2022 we’ve seen a reset to lower property values. Properties themselves are generally performing quite well, but investors are demanding higher returns to reflect the higher risk-free rate, and therefore paying less for properties,” said Sarraf and Richards.

Recently, PennPSERS committed $175m to ACORE Opportunistic Credit II (AOC), a real estate credit strategy. 

As per a recent
report by White & Chase, most allocators are moving towards opportunistic fund
strategies in the current year, followed by special situations.

“The dislocation in
real estate valuations during the past 12 months, coupled with tightening
liquidity, a debt maturity wall and distress in Chinese real estate, have made
opportunistic favorable,” stated a recent report by White & Chase.

“There is growing
consensus that interest rates in the US, UK and Europe have peaked, and as long
as rates stabilize and a lid is kept on inflation, real estate investment
activity should start to rebound,” added the report.

(Source: White & Chase report)