REIT Bulls Look to Pension Funds

Because not all of the target allocations have been invested, there is always money sitting on the sidelines. Lately, more and more money seems to be sitting it out, since finding attractive yields in real estate is difficult given all the money that is chasing the sector.

However, trying to get an exact handle on the amount of money waiting to be invested at any given time also is a tricky task, says Doug Poutasse, chief investment strategist with AEW Capital Management, one of the largest real estate investment advisers for pension funds. Another difficulty is figuring out whether this money is really "dedicated" or not.

"I think all estimates of the 'on the sidelines' amount are highly subjective," Poutasse wrote in an email. However, he said it is true that considerable funds have been "hard committed" through closed-end funds that gather money to invest in direct properties, and that money will stay in the market almost regardless of relative opportunities. "A lot more is targeted but not legally committed, and I think it is pure guesswork as to how this will move. The stock market (U.S. at least) is not exactly lighting anyone's fire this year," he wrote.

So in the end, even though pension funds have a good track record of committing money to REITs in the past, perhaps this money shouldn't be fully relied upon, given where the market might be heading. As Jonathan Litt, a Citigroup analyst also present on the NAREIT panel, reminded the audience in Chicago, all the money chasing Internet and tech stocks in the late 1990s looked pretty dedicated too, at the time. However, Litt did grant that there is also some floor under REIT pricing, but didn't estimate how low.

Sure, there might be some more takeouts of public REITs in coming months. Arden Realty (ARI Quote), an office REIT focused on the Southern California market, has been mentioned as a company that could be soon bought out around $50 a share, representing about a 10% premium to where it trades now. Post Properties (PPS Quote), an apartment REIT, has also had its name thrown around as a takeover candidate.

But with the two-year Treasury note yielding around 4.4%, REITs will continue to be under pressure as a yield investment. Some REIT watchers, like Ken Rosen of the Rosen Real Estate Securities, are predicting REITs could decline as much as 20% next year if the yield on the 10-year note pushes above 5.5%. If that's the case, it's hard to see how much of a cushion pension funds could provide to the sector.