A conversation with Industry leaders
Sara Shean and Michael O’Connor are co-presidents of the Defined Contribution Real Estate Council (DCREC). Shean is Executive Director at PGIM Real Estate, serving her first year as co-president. O’Connor is a Managing Director with Clarion Partners. This is his second year as co-president.
Sara Shean, PGIM Real Estate
Michael O'Connor, Clarion Partners
What is the current state of the defined contribution market for daily valued real estate products?
We continue to see increased interest and growth in the use of daily valued real estate in defined contribution plans. That’s reflected in the increase in the number of products available, the assets held in these products, and in the expansion of our membership over the last several years.
There are now at least 16 daily valued real estate products in the market, with more coming in the next 12-24 months. That’s up from nine in 2015. There’s an estimated $40 billion invested in these products. Our membership has seen a similar growth trajectory. When we established the DCREC in 2012 we had eight members. We have 39 now, including 10 that joined in the last year alone. Collectively, they manage about $1.1 trillion in real estate assets.
Is the DCREC planning new research projects for 2020?
Yes. We are working on a few projects regarding liquidity in utilizing private RE in a DC plan, exploring updates to daily valuation principles and we are also looking at fiduciary litigation. Given current market conditions driven largely by Covid-19, we also expect to share how real estate weathered the crisis later in 2020.
There has been a lot of growth in indexing products in DC plans. How does that impact the use of direct real estate?
We think all these products have a role to play. Index funds are typically low cost and are particularly good at providing broad market exposure. Real estate has other benefits – a generally low correlation with the broader equity markets, exposure to a major asset class that plays an important role in our economy, and a steady stream of income.
What will drive future adoption of this asset class by plan sponsors?
There are a number of powerful factors driving the adoption of real estate. Possibly the most significant is the growing use of target date funds (TDFs) in DC plans. They represent about 25% of the DC market today, and 55-60% of all new flows. Multi-asset structures like TDFs are the ideal way to implement diversifiers like real estate within a DC plan.
A second factor is the growing use of outsourced chief investment officers (OCIOs) and the development of more custom solutions for the DC market. Many of these outsourced solutions incorporate diversifying asset classes that are regularly used in from the defined benefit world. We are also seeing more interest from the consultant community, and more mandates that include a real estate option.
Finally, the recently passed Secure Act should also be a long-term positive for the asset class. When smaller plans pool their assets and bring in more professional management it becomes more likely that they will include real estate as an investment option. All this suggests that the growth we’ve seen over the past few years is likely to continue, and even accelerate.
What have been some of the biggest achievements of the DCREC to date?
There have been many, but maybe the most fundamental is the establishment of a widely accepted set of industry best practices. This provides a roadmap for anyone who wants to include real estate as an option in a DC plan. Within best practices, questions about liquidity and daily valuation frequently come up, particularly for direct real estate. We’ve provided a series of recommendations for addressing both these questions that has been well received by the community and has helped remove them as an issue for most plans sponsors and consultants.
What are your biggest challenges?
Continuing to provide educational resources for the plan sponsor and consulting communities on the important role real estate can play in a DC plan. Indexing will continue to grow, but it doesn’t solve every issue for every plan. Real estate will have an important role to play for all the reasons we’ve discussed. We need to continue to work to get that message out.