With the real estate market booming across the country, it may be hard to ignore the capital appreciation aspect of real estate investments. But for many institutional portfolio managers, real estate is a core holding rooted firmly in the fixed income side of the asset mix.

Sure, housing prices seem sky high, but residential property makes up only a small piece of most institutional real estate portfolios. Besides, have you looked at equity valuations lately? How about commodities — are you comfortable upping your client’s allocation at these levels?

Institutional managers are still in love with real estate, as long term holdings offer a steady stream of income. The relative lack of liquidity does little to deter the managers of massive pension portfolios, since longer-term leases on industrial and commercial properties make it easier to match assets to future liabilities.

As with all asset classes, shortsightedness and the traumatic impact of periodic downturns tend to distort perceptions of real estate. For some investors, the bloodbath of the early 1990s left the impression that real estate is volatile.

“The stability of real estate is something that really surprises a lot of people when they see it for the first time,” says Catherine Marshall, CFA, senior vice president, research and strategy, LaSalle Investment Management, a global real estate portfolio advisor with offices in Toronto and Vancouver. “It’s as though people only remember real estate recessions and think that real estate is very unstable, when in fact real estate recessions have very minor impacts on long term performance.”

The scope of private real estate portfolios can be mind-boggling. According to Michael Catford, vice president, Hospitals of Ontario Pension Plan, institutional portfolios currently control 53% of all Class ‘A’ office space across Canada and 71% of regional shopping centres. Among the 100 largest defined benefit plans, the average real estate allocation is 5.7%.

He says the combined market value of publicly listed REITs and real estate operating companies is about $46 billion, while the value of institutionally held real estate is closer to $58 billion.

“The real estate industry, by and large, has had a terrific run these past few years,” he says “We’re no longer a social pariah; we’re a legitimate asset class.”