Real estate

Challenges to long-term asset allocation and risk management in real estate investments

There are long-term asset management challenges and increasing risk management in real estate investments, a survey by MSCI has found.

The report, “Long-Run Investment Ambitions and Short-Run Investment Processes”, surveyed asset allocation practices among pension funds and sovereign wealth funds around the world.
 
“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. There is no consensus in either the frequency with which they make strategic asset allocation decisions or in the methods they use to do it. This can lead to wide variation in investment outcomes,” says Neil Gilfedder, managing director and head of analytic applied research at MSCI.
 
The survey also found that 95 per cent of respondents plan to increase or maintain allocations to alternative asset classes.
 
“The reasons asset owners give for holding alternatives are quite diverse,” Gilfedder says. “When they invest in real estate in particular, some asset owners are looking for returns, others for income and still others for diversification of risk. Without a clear understanding of how alternatives contribute to the risk and return of an overall portfolio, they have no basis for setting expectations with regard to investment outcomes.”
 
As part of the study there was an exploration of the steps being taken by asset owners to strengthen risk management of real estate exposure. Based on publicly available data of a 138 global asset owners, the research analysed the use of benchmarks and the monitoring of portfolio and asset-specific risks.  It found that although 70 per cent of asset owners have real estate policy benchmarks, over 80 per cent of them have some benchmark misalignment, often using domestic benchmarks when investing in foreign markets.
 
“The findings reveal significant variations in the role of real estate in investor portfolios, creating the potential for inaccurate views of actual exposure,” says Peter Hobbs, managing director of research for MSCI-IPD. “Asset owners are working hard to overcome these challenges by better integrating real estate with other asset classes and tightening up their risk management practices.”

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