The Case for REITs-And for Real Estate
Ogden, Joan, Global Finance
REITs are more liquid, but real estate smooths out total return.
Are REITs real estate or equities? Or, to put it another way, are REITs a complement to or a substitute for real estate investment?
"That's a good question, but we don't have the answer right now," says Scott Franklin, pension finance specialist at Shell Oil in Houston, Texas. "Some have said the future direction is that all real estate investing should be done in the public market. It's a matter of the net return against the resources available. Private real estate investing is staffintensive." But he adds that Shell is continuing to hold properties in its pension fund portfolio, even while it is getting out of another form of core real estate, commingled (private) real estate funds.
By and large, however, multibilliondollar US pension funds are cutting back on core real estate and moving into REITs-even while they ponder if REITs are real estate in the first place.
There are many advantages to a publicly traded REIT (real estate investment trust) over traditional real estate. The chief ones are probably liquidity and the ability to turn over a REIT investment to an equity manager at a fraction of the management cost. That's what Johnson & Johnson's $4 billion pension fund has done, according to William Rauh, director of pension funds at the pharmaceutical company's New Brunswick, New Jersey, headquarters. "We gave up core real estate about four years ago because other asset classes were more attractive," says Rauh. "Our equity managers are invested in REITs, but approximately to the same degree as the REIT weighting in the Russell 2000 index."
But larger pension funds, such as Shell's, with $13 billion in retirement assets, can't divest themselves of core real estate entirely now because the total capitalization of the REIT market, at about $125 billion, is still too small. …