Now's the time for more real estate investing in your DC plans

Real estate investments by Defined Contribution (DC) plans are on the rise, according to a new survey of asset managers. The report, by the Defined Contribution Real Estate Council (DCREC), NAREIM (a real estate investment association), and Ferguson Partners, found that with rising inflation, real estate is seen as an attractive alternative to other investments.

The 2022 Survey included 35 real estate investment management firms representing around $80 billion in investments. The report said managers, consultants, and plan sponsors have been increasingly looking at real estate investments to diversify portfolios and protect against inflation.

The findings support a January report from J.P. Morgan that found a “dramatic revival” in investments by DC plans. “After a year of rapid economic expansion fueled by historic levels of fiscal stimulus and loose monetary policy, inflation is surging in developed markets,” said the J.P. Morgan Asset Management analysis. “Global investors, alert to the threat of rising interest rates, are increasingly focused on real assets as alternative sources of yield and inflation protection.”

Growing options

In addition to growing acceptance among investors, plans now have more real estate investment options to consider, the report added.

The DC markets are still a relatively small part of the real estate market, the report noted, making up less than 5% of the market, but the number of options is growing. In the 2022 survey of real estate investment managers, three quarters of respondents said they already had a DC product, were actively developing one, or were considering developing a product for the DC market within two years.

“Against a backdrop of post-COVID-19 market volatility and real estate outperformance, both new and existing DC investors made new commitments to private real estate in 2021,” the report said. “In the past year alone, real estate DCX assets under management (AUM) increased 22.5% among these established managers.”

Outperforming other asset classes

The study found that in 2021, real estate outperformed other asset classes—prompting new contributions. Private real estate has grown in importance because of its relative liquidity. Being able to quickly manage liquidity is fundamental to all real estate DC strategies, the report noted. “Even during periods of normal economic activity, there is a need for DC investors to rebalance their portfolios. During more significant or extreme economic activity, that rebalancing need may increase.”

Issues like liquidity will continue to be a focus of investors as the market continues to develop, but officials with DCREC said new strategies continue to come online.

“The industry has continued to evolve and to establish ‘best practices’ to address issues like liquidity and daily valuation, identified as concerns by survey participants,” said Jani Venter, Co-President at DCREC. “We expect to see further growth in both assets under management and available products going forward.”

However strong the market has been recently; some uncertainty remains due to rising interest rates and the threat of recession. This analysis on the Financial Advisor website noted that the most resilient assets tend to be multifamily real estate assets.

“Despite peaked inflation and rising interest rates, over the past year, real estate investments have continued to produce steady, predictable income,” the article noted. “That said, certain real estate property types are more vulnerable to inflation and climbing interest rates than others—with multifamily assets in particular standing apart. Characterized by short-duration leases, or by rents linked to revenues, multifamily assets provide the highest level of inflation protection.”

The analysis said that multifamily real estate assets are more resilient because of their tendency to have short-term leases. “This fundamental allows asset owners to quickly adjust rents to compensate for inflation and capitalize on increased demand,” the article said.