Magazine article Journal of Property Management

New Demands from Pension Fund Investors

Magazine article Journal of Property Management

New Demands from Pension Fund Investors

Article excerpt

A new sense of partnership is emerging between asset managers and their pension-fund clients. The tension that currently crackles between institutional investors and their outside managers is likely to result not in divorce, in most cases, but in a redefinition of the relationship. Fund sponsors are demanding more participation and a greater role in decision making--as well as greater control over the asset managers themselves.

New pressures on assets managers reflect pension funds' feeling disillusioned with real estate, to judge from speakers at the Pension Real Estate Association's Spring conference in Beverly Hills. Some asset managers are being fired, although they represent only a small fraction of the industry. More frequently, managers are being called on the carpet for a perceived failure to alert their clients to poorly performing buildings or missed opportunities to sell problem properties. And fees are undergoing intense scrutiny.

The dissatisfaction of pension funds with real estate is clear from a recent survey of 1,538 pension fund sponsors by Greenwich Associates of Greenwich, Connecticut. Thirty funds have left commercial real estate altogether, while up to 120 plan to terminate their managers outright. "I don't think the pension funds trust their asset or plans managers [to do a good job for them]," said Greenwich Associates' Rodger Smith.

From rage to reality

Yet the mood of recrimination seems to have mostly passed. Sponsors of U.S. pension funds, which doubled their real estate holdings in the past five years to a total $100 billion, seem to have acknowledged that their real estate portfolios are performing poorly and have lost up to 30 percent of their value across the board.

At the same time, fund sponsors are not uniformly negative about property markets. The Greenwich Associates survey showed a revealing split in attitudes, with 31 percent of fund sponsors saying they planned to withdraw some capital from real estate and another 22 percent seeing good prices and opportunities in the down market. Those figures suggest that some fund sponsors have an entrepreneurial eye for value-added deals.

Many fund sponsors also blamed themselves for not taking a more active role in decision making. "Our job right now is how to cope with what went wrong in the '80s," said Charles Grossman of the New York office of Jones Lang Wootton Realty Advisors. George Philip of the New York State Teachers Retirement System said he and his fellow sponsors "should be involved in the entire process, including pricing," rather than simply rubber-stamping the decisions of their asset managers.

At the same time, Philip said he "would like to get a better handle on what an asset manager does." He described the '80s as a period of "too much chasing" after buildings "without a real handle on the asset class." In the future, he said, pension-fund sponsors will be "a far more knowledgeable group, who will assume much more responsibility. We see ourselves as much more involved."

Specifically, Philip said, that involvement will take the form of greater participation by fund sponsors in "buy/sell" decisions, as well as "a good deal more ongoing participation in asset management." Fund sponsors must look after their own interests, he added. "I don't think plan sponsors can rely on asset managers solely to protect their interests. It's up to sponsors to protect themselves; they can't be passive."

Asset managers also at fault

Some consultants and asset managers acknowledged the need for more localized attention to individual properties. Blake Eagle, president of Frank Russell Company's real estate consulting group in Tacoma, said some fault lies with managers and consultants. Instead of a business of serving tenants, he said, "real estate became an investment commodity."

Asset managers also have the unenviable task of explaining the sudden, across-the-board devaluation of commercial real estate, which consultants had marketed intensely to pension funds in the 1980s on the basis of resilient values and high historic returns. …

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