The Value of Commercial Real Estate in Insurers' Portfolios
August 21, 2023
By Matt Reilly, Managing Director, Insurance Solutions
Let every man divide his money into three parts, and invest a third in land, a third in business and a third let him keep by him in reserve – The Talmud
Even thousands of years ago, humankind understood the role real estate played in a well-balanced investment strategy. What was not foreseen was the evolution of capital markets and the unique investment constraints insurers now face as they balance generating sufficient income to meet obligations and provide their portfolios growth to build long-term surplus.
Real estate investments can help insurers with these objectives - and larger insurers have utilized this strategy for decades (see Exhibit 1). Small and mid-size insurers have been less active in real estate and could benefit from a better understanding of the sector, its role in insurance portfolios, and the types of real estate investments that are appropriate for insurers.
Insurers unfamiliar with real estate may be hesitant to add the asset to their portfolio mix, but Conning thinks that could be a missed opportunity. Our knowledge of real estate and experience in partnering with insurers can be of significant value in helping build more diversified portfolios and growing their businesses.
Too Large an Asset Class to Ignore
The U.S. commercial real estate (CRE) market is estimated to be about $21 trillion1 or nearly half the size of the U.S. stock market.2 Most investors looking to build a broadly diversified investment portfolio would likely want to include commercial real estate, and it has consistently been an allocation among a broad array of institutional portfolios for the last three decades.
The CRE market includes various property types (multifamily, industrial, retail, self-storage, office, etc.), geographies and transactions. All real estate cannot be lumped into one monolithic asset class, as within the same segment and even within similar property types, the underlying economic drivers of a transaction can vary – and so can expected risk and return. Property types and markets matter!
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1 Source: (c) 2023 National Association of Real Estate Investment Trusts, “Estimating the Size of the Commercial Real Estate Market in the U.S.,” https://www.reit.com/data-research/ research/nareit-research/estimating-size-commercial-real-estate-market-us-2021, data as of June 30, 2021, accessed August 1, 2023, used with permission.
2 Source: (c) 2023 Siblis Research LTD., “Total Market Value of the U.S. Stock Market,” https://siblisresearch.com/data/us-stock-market-value/#:~:text=The%20total%20market%20 capitalization%20of,about%20OTC%20markets%20from%20here., data as of June 30, 2023, accessed August 1, 2023.
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Risk of CRE Investment
All real estate investments are speculative and involve substantial risk. There can be no assurances that all or any of the projections will be true or that actual performance of any real estate investment will bear any relation to the projections or other hypothetical illustrations provided by Conning and no guarantee or representation is made that investment objectives of any strategy or fund will be achieved In the event that actual performance is below projections. Investors’ investment could be materially and adversely affected, and there can be no assurance that any investor will not suffer significant losses. A loss of part or all of the principal value of a real estate investment may occur. All prospective investors should not invest unless such prospective investor can readily bear the consequences of such loss Please see and carefully review the investment documents for additional information concerning any specific real estate investment, including an issuer’s discussion concerning risk factors.