The California Public Employees’ Retirement System plans to
increase its $26 billion of commercial real-estate investments by 27%,
according to its latest asset-allocation report. The boost would leave Calpers
with its largest property holdings since before the financial crisis.
More than a decade ago, Calpers started loading up on funds
investing in more speculative properties like shopping malls and office
developments in a bid to boost returns. Those bets proved ill-timed, as the
recession and commercial-property bust led to losses of around $10 billion, or
about half the value of its portfolio during the downturn.
This time it is focusing on investments such as fully leased
office towers and apartments in big cities, which it argues are safer because
there is established demand for these properties. In another shift, the giant
pension fund has been investing almost exclusively through real-estate funds
that manage separate accounts created for Calpers, which offers more control
over how that money is invested. Calpers’ real-estate play is emblematic of a
larger movement by big investors in recent years toward safer assets such as
Treasury bonds.
Prices of higher-quality properties have shot up 82% over
the past five years and now are above their precrisis high in 2007, according
to the Green Street Advisors Commercial Property Price Index. The
capitalization rate for major metropolitan office buildings has fallen to about
6% from 8% in 2010. Some of Calpers’ real-estate consultants are warning that
moving too much money into pricey properties could backfire.
The fund’s goals now are to diversify its portfolio risk and
generate steady, modest gains, rather than striving for outsize returns with
more speculative bets, he said. Likewise, Calpers on Sept. 15 said it would
shed its $4 billion investment in hedge funds as part of an effort to simplify
its assets and reduce costs.
After the dot-com bust of 2000, Calpers turned to real
estate for the double-digit gains it no longer could count on from stocks. That
meant putting money into higher-risk real-estate funds that used up to 80%
levels of debt while aiming for returns of 20% or more. With prices rising, the
riskier, debt-oriented strategy worked at first. For the fiscal year ending June
2006, the real-estate portfolio returned 35%. But the losses began to mount
during the financial crisis.
Before the 2007-2008 bust, Calpers was part of a plan to
build twin 53-story condominium towers on a prominent block-long parcel that
overlooks the entrance to Sacramento and leads to the state capitol building.
But financing for the condos fell through in 2007, and the land is now
surrounded by a green fence and pockmarked with trees, brown grass and pilings
driven into the ground.
Calpers, which contributed $100 million to the twin-tower
plan, hopes the proximity to an established business district and other new
projects, including a new basketball arena for the Sacramento Kings, ultimately
will attract new development. An external real estate manager, CIM Group,
currently is considering various proposals.
Calpers has raised its target allocation for real estate to
11%, which would require investing another $7 billion in property, based on the
fund’s nearly $300 billion in total assets. So far this year, Calpers has been
moving in the opposite direction. The pension fund has been a net seller of
$688 million in real estate for 2014, according to Real Capital.
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