TIAA-CREF Real Estate acceptable REIT substitute?

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TIAA-CREF Real Estate acceptable REIT substitute?

Postby tj-longterm » Sat Jan 26, 2013 8:45 pm

We have a 403(b) that has a number of good Vanguard and TIAA-CREF options. However, our IPS calls for a percentage of our allocation to TIPS (no inflation protected securities available in 403(b)) and REITs (but only Real Estate Account available). Both of these options we'd like to have in tax-advantaged space.

The TIAA-CREF prospectus describes the Real Estate Account as a variable annuity that is directly invested in real estate, so it is substantially different from an REIT fund.

We have some IRAs, but not enough to hold the TIPS and REITs together. Basically, we can put one in our IRAs and the other in our 403(b). Since TIPS are not an option in the 403(b), we're considering the Real Estate Account. Is this an acceptable substitute for an REIT fund in our allocation? Reading the forum the biggest difference is that the net asset value lags real estate prices because the properties have to be re-assessed/re-valued in order to update the NAV. But, I'm not sure the significance of that for our allocation.
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Re: TIAA-CREF Real Estate acceptable REIT substitute?

Postby sscritic » Sat Jan 26, 2013 8:48 pm

If your goal is to hold a REIT for the volatility, then clearly the REA won't be a good substitute. Usually, people go the other way around. A REIT is not a good substitute for the REA.
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Re: TIAA-CREF Real Estate acceptable REIT substitute?

Postby tj-longterm » Sat Jan 26, 2013 9:05 pm

The main reason to hold REITs in my mind is the low correlation to stocks, which suggests that owning them should have a diversification benefit.

My only options in tax advantaged space are:

1) Vanguard inflation protected securities + TIAA CREF Real Estate Account
2) Vanguard REIT Fund only + something else (probably total bond market to replace TIPS)
3) Vanguard inflation protected securities + something else (probably total stock allocation to replace REITs)

If Real Estate Account is more like a bond than an REIT, I suppose it's not what I want and I should choose option 2 or 3 and adjust my IPS accordingly.
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Re: TIAA-CREF Real Estate acceptable REIT substitute?

Postby livesoft » Sat Jan 26, 2013 9:11 pm

You might be disappointed in "low-correlation" since I think the REIT index has significant correlation to equities. And owning REA didn't save your butt in the Great Recession. Many folks essentially "front-ran" it, too.

I own both the REIT index and TIAA REA, but I would recommend that you sell TIPS and buy the REIT. Just buy some other bond fund to replace the TIPS. For example, I suppose you could've asked: "Is TIAA Traditional Annuity an acceptable TIPS substitute?" I would answer: Yes.
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Re: TIAA-CREF Real Estate acceptable REIT substitute?

Postby G-Money » Sat Jan 26, 2013 9:22 pm

I think many Bogleheads would gladly exchange their REIT for TIAA Real Estate if they had the opportunity. For many, Vanguard's REIT is simply the cheapest/closest option for investing directly in the type of commercial real estate you'd get direct access to with TIAA.
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Re: TIAA-CREF Real Estate acceptable REIT substitute?

Postby Valuethinker » Sun Jan 27, 2013 4:20 am

tj-longterm wrote:We have a 403(b) that has a number of good Vanguard and TIAA-CREF options. However, our IPS calls for a percentage of our allocation to TIPS (no inflation protected securities available in 403(b)) and REITs (but only Real Estate Account available). Both of these options we'd like to have in tax-advantaged space.

The TIAA-CREF prospectus describes the Real Estate Account as a variable annuity that is directly invested in real estate, so it is substantially different from an REIT fund.

We have some IRAs, but not enough to hold the TIPS and REITs together. Basically, we can put one in our IRAs and the other in our 403(b). Since TIPS are not an option in the 403(b), we're considering the Real Estate Account. Is this an acceptable substitute for an REIT fund in our allocation? Reading the forum the biggest difference is that the net asset value lags real estate prices because the properties have to be re-assessed/re-valued in order to update the NAV. But, I'm not sure the significance of that for our allocation.


The RE is actually better than a REIT fund, because it is a pure play on commercial RE.

One thing to watch is people market time it (they liquidated ahead of reductions in NAV which were apparent from published data on RE indices). I gather that TIAA has imposed liquidity restrictions because of this. There was a real trend of 'momentum following' on TIAA RE, and that's contrary to the goal, and efficient operation, of such a fund.

If you go back to Swensen he talks about this fund (is/ was on the Board). It's really the only low cost Limited Partner CRE investment available to US investors, and that is the same way that the professional institutional investors invest in the asset class ie as 10 year Limited Partners in privately managed funds (most of the ones, Swensen goes through it, available to US individual investors are con jobs charging huge fees, but TIAA RE appears to be the sole widely available exception-- if you added up all the money individual investors have lost in private RE partnerships, it would add up to 10s of billions).

If you can live with the liquidity characteristics, then I would hold your Commercial RE allocation in this, over a REIT fund. The latter will be more volatile and will not 'track' Commercial RE characteristics (income the major factor in returns, lower volatility than stocks, lower returns, higher correlation with inflation) as well.

Note Morningstar has a TIAA Forum where they disucss this fund to death. Some there have been adept at 'front running' the whole NAV increase/ decrease thing.
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Re: TIAA-CREF Real Estate acceptable REIT substitute?

Postby Valuethinker » Sun Jan 27, 2013 4:25 am

tj-longterm wrote:The main reason to hold REITs in my mind is the low correlation to stocks, which suggests that owning them should have a diversification benefit.

My only options in tax advantaged space are:

1) Vanguard inflation protected securities + TIAA CREF Real Estate Account


If you are worried about inflation this would probably give you the highest protection.

2) Vanguard REIT Fund only + something else (probably total bond market to replace TIPS)


I am not sure why, particularly, you want to do the latter. If you are worried about deflation buy IT US Treasuries, but REITs will do badly in that scenario (Japan last 22 years). If you are worried about inflation you have lost some protection. Is the yield pickup into TBM so large as to justify that risk?

3) Vanguard inflation protected securities + something else (probably total stock allocation to replace REITs)

If Real Estate Account is more like a bond than an REIT, I suppose it's not what I want and I should choose option 2 or 3 and adjust my IPS accordingly.


The TIAA RE is emphatically *not* a bond. What it is is units in a private fund. Should track the long term performance of US commercial RE indices.
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Re: TIAA-CREF Real Estate acceptable REIT substitute?

Postby sscritic » Sun Jan 27, 2013 9:35 am

Valuethinker wrote: I gather that TIAA has imposed liquidity restrictions because of this.

The amount you can move into (not contribute to) REA is now limited; the total account value cannot exceed $150k after the transfer. This stops people with $300k in the fund from pulling out $200k and then later trying to put it back in.
Effective March 31, 2011 (or such later date as indicated in the contract or contract endorsement), individual participants are limited from making internal funding vehicle transfers into their Account accumulation if, after giving effect to such transfer, the total value of such participant’s Account accumulation (under all contracts issued to such participant) would exceed $150,000.
...
This limitation does not apply to most types of premium contributions and certain group contracts recordkept on non-TIAA platforms.
Prospectus
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Re: TIAA-CREF Real Estate acceptable REIT substitute?

Postby ofcmetz » Sun Jan 27, 2013 9:55 am

Having my 40B in TIAA-CREF gives me access to this fund as well. In my opinion small cap indexes hold plenty of REITS already. I like this fund for the reasons Valuethinker mentioned and keep 15% of my portfolio in it. I agree that it is quite different from owning REITs and is more akin to direct ownership of commercial real estate. Some have speculated that its returns may fall somewhere between those of stocks and bonds.

Rather than trying to count it as a bond or as a stock I simply consider it as real estate in my IPS.
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Re: TIAA-CREF Real Estate acceptable REIT substitute?

Postby JimInIllinois » Sun Jan 27, 2013 12:58 pm

Valuethinker wrote:If you can live with the liquidity characteristics, then I would hold your Commercial RE allocation in this, over a REIT fund. The latter will be more volatile and will not 'track' Commercial RE characteristics (income the major factor in returns, lower volatility than stocks, lower returns, higher correlation with inflation) as well.

Note Morningstar has a TIAA Forum where they disucss this fund to death. Some there have been adept at 'front running' the whole NAV increase/ decrease thing.


The liquidity restriction is that you can only do one redemption per quarter, and you have to do it over the phone (not online), but it can be for any amount. They have (and pay for) a liquidity guarantee from the much larger TIAA general account. Bulk purchases can't bring your total in the account above $150,000 (although regular contributions can).

I'm not sure what exactly is meant by "front running" here, but the fund has had exactly one major decline in its entire history, and both the top and bottom were broad and clear even at the time.
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Re: TIAA-CREF Real Estate acceptable REIT substitute?

Postby jjustice » Sun Jan 27, 2013 1:14 pm

TIAA Real Estate Account does much better than REIT funds on traditional measures of return/risk. For example, the three-year Sharpe ratios for Vanguard and TIAA REIT funds are .99 and 1.00. The Sharpe ratio over the same period for the Real Estate Account is 3.99.
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Re: TIAA-CREF Real Estate acceptable REIT substitute?

Postby Willy » Sun Jan 27, 2013 9:04 pm

Sounds like most folks posting on this thread so far believe that the TIAA-CREF Real Estate fund is superior to REITS, such as Vanguard's. Does anyone see any advantages to Vanguard's REIT over the TIAA Real Estate fund?

Thanks much.
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Re: TIAA-CREF Real Estate acceptable REIT substitute?

Postby patrick » Sun Jan 27, 2013 10:03 pm

Willy wrote:Sounds like most folks posting on this thread so far believe that the TIAA-CREF Real Estate fund is superior to REITS, such as Vanguard's. Does anyone see any advantages to Vanguard's REIT over the TIAA Real Estate fund?

Thanks much.


Two possible advantages of Vanguard's REIT fund (or any other low cost REIT index):

- Diversification. The REIT fund would be spread across many REITs, while the TIAA account is similar to investing in one single REIT.
- Transparent share prices. The REIT fund is priced according to the public market prices of the REITs it contains. However, the share price of the TIAA fund is not and so you might buy or sell at a worse price than the fair market price of the assets. Also, there is the risk of front running as mentioned by previous posters -- if some investors are able to front run successfully the rest of the investors will lose as a result.

Which is not to say that I wouldn't use the TIAA real estate account in this situation, only that there are some disadvantages worth noting.
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Re: TIAA-CREF Real Estate acceptable REIT substitute?

Postby JRA » Mon Jan 28, 2013 12:01 pm

Not too long ago Larry Swedroe commented on the Reit vs. RE issue http://www.bogleheads.org/forum/viewtopic.php?f=10&t=105509. He said he preferred Vanguard's Reit fund over TIAA RE but, other than citing the high costs of the fund, was not real specific. My wife owns the RE fund in a 403B account with a former employer. We decided to keep the money at TIAA-Cref to have access to the Traditional account for her GSRA funds during this low interest rate period (guaranteed 3% rate with no limitations on liquidity). We bought the Real Estate Annuity with her RA funds because the other bond and stock options were so expensive (over 40 basis points). I certainly wouldn't stay at TIAA-Cref simply to get access to the Real Estate Annuity, but it is currently serving its purpose.
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Re: TIAA-CREF Real Estate acceptable REIT substitute?

Postby Browser » Mon Jan 28, 2013 1:16 pm

JRA wrote:Not too long ago Larry Swedroe commented on the Reit vs. RE issue http://www.bogleheads.org/forum/viewtopic.php?f=10&t=105509. He said he preferred Vanguard's Reit fund over TIAA RE but, other than citing the high costs of the fund, was not real specific. My wife owns the RE fund in a 403B account with a former employer. We decided to keep the money at TIAA-Cref to have access to the Traditional account for her GSRA funds during this low interest rate period (guaranteed 3% rate with no limitations on liquidity). We bought the Real Estate Annuity with her RA funds because the other bond and stock options were so expensive (over 40 basis points). I certainly wouldn't stay at TIAA-Cref simply to get access to the Real Estate Annuity, but it is currently serving its purpose.

I was recalling Swedroe's comment also, but don't remember the details. In general, I think he said that TREA was essentially non-liquid REIT fund. They both own the same assets (real estate), but you have non-liquidity risk factored into TREA returns. I think he preferred REIT over TREA as a purer play on real estate per se:

P.S. Here's what I was looking for. Larry's comment:
Overall REITS and private RE must be highly correlated because they own the same assets. What can seem to cause low correlation is that if you own one or a small number of properties or even a lot but in one sector or geographical region you can have low correlation just as you can have low correlation with TSM when you own one or a small number of stocks.

Also with REITS you have the daily volatility of the market being priced in, with private RE people don't mark to market daily so it appears they don't have high correlation. But that is phony, just failure to mark to market. This happens with illiquid stocks that don't trade often.

TREA returns must be highly correlated with REITs because they own the same assets. But TREA is like private equity that doesn't mark to market, so it's returns look different (less volatile), but it really has the same risk characteristics as REITs, and maybe others that are more obscure as well.
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