A new core portfolio
Cheigh said he and Garrett Zdolshek, CIO of IDR Investment Management, envision this strategy as a foundation for an institutional investor’s real estate portfolio.
“This can replace their core portfolio and do so in a way that is delivering more like what we call ‘core-plus return,’ delivering the liquidity that has been disappointing to people and to get more exposure to some of the next generation property types (such as data centers) that investors generally want,” Cheigh said.
On average, the strategy will be about two-thirds private core real estate, and one-third actively managed publicly traded REITs, and the strategy can tactically rebalance between its public and private exposure when needed.
“By it being integrated into one strategy as opposed to two separate line items managed by two separate managers, really the secret is being able to actually execute the rebalancing,” Cheigh said. “That’s where, working together with IDR, who has demonstrated an ability to manage inflows and outflows certainly for the last several years which has been a challenging time for a lot of these funds to manage liquidity, it just gave us confidence that we were getting both the knowledge of what allocation moves to make, but also just the ability to make the allocation moves by putting these strategies together.”
“I would add that listed REITs have probably been under-owned in these portfolios, historically because of the volatility and higher drawdowns, but they’ve also produced higher returns,” Zdolshek said. “So if we can actually focus on the best of both worlds, we believe it gives a very core-like volatility and correlation in a portfolio, but with a higher return.”
“I think for smaller or medium-size institutions, this strategy could certainly be their complete core real estate allocation,” Cheigh said. “I think for larger state pension funds as an example, this can just be a meaningful component of their real estate allocation.”
Zdolshek said the creation of the strategy is a direct result of asset owners acknowledging they have been experiencing a lower return environment than they want and needing their assets to work harder for them.
“For those that own public and private today, they’re asking ‘How do I make that 70/30 allocation work harder for me?’” Zdolshek said. “Because I don’t want just the individual results of the two. I want them managed cohesively.”
Zdolshek said that it has been demonstrated that private real estate lags public real estate when returns are going up as well as on the way down, and investors want to own different percentages of each during both parts of the cycle.
“We think it’s going to be very hard for someone to replicate the outcome of the partnership,” Zdolshek said. “This is why neither one of us felt we could achieve the same goal without each other. Cohen & Steers’ ability to consistently produce alpha in the REIT market is not something we’ve seen in other firms. We believe in the ability of IDR to generate diversified liquidity across private markets even in bad times. We deliver three times the liquidity of the ODCE on average.”
Zdolshek said in a later email, “Because of IDR’s proprietary methodology, diversified investment holdings and scale, the fund has provided significantly more liquidity than market average.”
“Real estate has been going through its adjustment process for the last couple of years, and it started with interest rates moving up a lot over the course of 2022 and really staying there,” said Cheigh. “The REIT market, which is usually a good leading indicator, it bottomed at the end of 2023, and while it hasn’t been a straight shot up, generally it’s been moving up.”
“We think that’s historically a reliable leading indicator that private markets have likely bottomed and have started to move up,” Cheigh said. “Usually, when people read more bad news in the newspaper about foreclosures of office buildings and things like that, that usually means we’re further along in the correction process, not early in the correction process. And so we think real estate is one of the few asset classes, frankly, that has discounted higher interest rates. We haven’t seen as much adjustment in other asset classes. So we feel good about the forward investment prospects for real estate.”
That sentiment was one of the reasons Cheigh and Zdolshek thought now would be a good time to launch this strategy.
“We think we’re at the point where this is setting up to be a good vintage year for this kind of investment,” Cheigh said.
