MSCI Survey: RE Still Popular Alternative Asset, but Risk Managers Face Challenges

A study by MSCI found that real estate investment remains one of the most popular alternative asset classes for pension and sovereign wealth funds, but those global-asset owners face challenges in long-term asset allocation and risk management.
CPE1013_global_Peter Hobbs

Peter Hobbs, MSCI-IPD

A study by MSCI Inc. found that real estate investment remains one of the most popular alterative asset classes for pension and sovereign wealth funds, but those global asset owners face challenges in long-term asset allocation and risk management.

“The survey results show that the biggest challenge these asset owners face is unifying long-term goals with the short-term nature of asset management,” Neil Gilfedder, managing director & head of analytic applied research at MSCI, said in a news release about the bi-annual study.

“There is no consensus in either the frequency with which they make strategic asset allocation decisions or in the methods they choose to do it. This can lead to wide variation in investment outcomes,” he added.

MSCI is a New York-based provider of investment decision support tools, including indices with approximately $8 trillion benchmarked to them around the world. For its 2013 MSCI Global Asset Owner Survey, they interviewed 40 asset owners with about $3.2 trillion in assets and received online responses from another 40 asset owners representing approximately $0.7 trillion in asset. The research team also reviewed public data from 138 global asset owners with about $10.3 billion in assets.

The survey found most of the respondents, 95 percent, plan to increase or maintain allocations in alternative asset classes. The report noted that real estate has the largest allocations among alternatives in all regions, except the United States where private equity is top. Still, the U.S. does have “relatively high allocations.”

“Real estate is a favored class but is under increased scrutiny from risk managers given the losses of the financial crisis and the increasing importance of real estate (and other alternatives) in the overall portfolio,” Peter Hobbs, managing director of research at MSCI-IPD, told Commercial Property Executive. “There is strong pressure to increase the dialogue between the top down-quantitative risk managers and the bottom-up asset specific real estate executives, to ensure that real estate is monitored on a like-for-like basis with other asset classes.”

While reviewing the public data of the 138 asset owners, the researchers found high use of benchmarks with 70 percent using them to monitor portfolio and asset specific risks. But the study found more than 80 percent of them has some benchmark misalignment, such as using domestic benchmarks for foreign investments.

Asked what the main cause of benchmark alignment is, Hobbs said inertia.

“It often takes a number of years to change benchmarks due to the various approvals that are required so there is considerable inertia on any change,” he said. “Many benchmarks were set when real estate portfolios were focused on domestic Core real estate. Over recent years as investors have started building their overseas exposure and investing in other types of real estate such as REITs and Opportunistic Funds, there has been a tendency for misalignments to emerge.”

Hobbs said it is likely that the benchmarks will be revised to reflect the current investment strategy, reducing the misalignments.

One of the challenges cited by the survey participants was the “paucity of asset and portfolio specific data.” Some said they have good data on the portfolios they control directly but would like more information on funds where there is less information available. Those questioned for the online survey said the lag in performance reporting was their biggest challenge for risk analysis.

Hobbs told CPE this is a major issue because it can lead to “style drift.”

“There needs to be a connection between the top-down strategic allocations to real estate and the monitoring of the exposure to ensure that implementation is aligned with strategy,” he said.

The survey notes that asset owners are making concerted efforts since the global financial crisis to have risk teams increase oversight of real estate departments. Those that don’t have effective risk oversight “are exposed to potential misalignment between strategic allocation decisions and the implementation of strategy,” according to the report.

Hobbs warns that while some lessons have been learned from the financial crisis, “the jury is out right now.”

“The wave of capital headed to real estate creates significant pressures for real estate executives to move up the risk spectrum so these pressures need to be effectively managed,” he added.

One way to do that is to monitor and summarize key portfolio and asset-specific risks and integrate with broader multi-asset class risk analysis, Hobbs concluded.