After a nearly year-long review, the nation’s largest public pension plan is finally making some significant moves with its real estate assets, tapping its best performing managers with new assignments.
The California Public Employees’ Retirement System (CalPERS) is in the midst of restructuring its $15 billion real estate investment portfolio, shifting assets to managers who outperformed peers in managing through the recent real estate market downturn.
CalPERS’ real estate investment portfolio lost 53.6% in the fiscal year that ended June 30, according to the latest real estate quarterly report. With $222 billion in assets under management, CalPERS administers retirement benefits for 1.6 million state and local employees, retirees and their families.
On Jan. 3, CalPERS transferred a $724 million real estate portfolio, known as National Office Partners (NOP), to one of its existing managers, CommonWealth Partners. The NOP portfolio, previously a joint venture between Hines and CalPERS, was the lowest performing in CalPERS' core office subsector, earning an annualized 0.6% return, after fees, since its July 1998 inception.
The portfolio includes 5.2 million sq. ft. of Class-A properties in major U.S. markets, including San Francisco, Palo Alto, Calif., Boston, Chicago, Seattle, Minneapolis, Salt Lake City, Austin, and Denver.
CommonWealth has executed more than $4 billion worth of transactions in other CalPERS partnerships since 1998. “CommonWealth Partners has done extremely well for us for over 12 years now, and we anticipate very good performance from them and the domestic office portfolio,” says Ted Eliopoulous, CalPERS’ senior investment officer for real estate.
In early December 2010, CalPERS shifted its CalEast Global Logistics industrial real estate portfolio to GI Partners and RREEF. The pension fund transitioned CalEast’s North American assets, valued at $1.9 billion, to GI Partners and its European industrial assets, valued at approximately $60 million, to RREEF. CalEast was previously managed by LaSalle Investment Management.
“We have confidence in GI Partners and expect excellent performance from the CalEast portfolio going forward, given their strong returns since they joined our real estate program in 2001,” said Eliopoulos. “RREEF’s success with CalWest and their global breadth and expertise will be valuable in managing CalEast’s European assets.”
CalPERS has a total of more than $700 million with three GI Partners funds. Formed in 2001, GI Partners is a leading trans-Atlantic private investment firm that focuses on asset-backed businesses and properties in North America and Western Europe. Since its inception, the firm has secured $4 billion of capital commitments on behalf of institutional private equity and real estate investors in the U.S., Europe, Asia, and the Middle East.
RREEF, the real estate investment management business of Deutsche Bank’s Asset Management division, acquires and manages investments in commercial and residential property, and real estate securities on behalf of its institutional and private clients worldwide. RREEF has managed CalWest Industrial Properties for CalPERS since 1998.
New allocation strategy
Real estate figures prominently in the investment plans of CalPERS going forward. It recently adopted a new strategy for its investment allocations, creating five new groups. Real estate falls within the new “real” group, along with infrastructure and forestland. The targeted allocation to real estate will jump to 13%, up from the fund’s longstanding allocation of 10%.
The new strategy also allows for more flexibility in the amount of money it directs to the real estate sector. In the future, the fund could invest as little as 8% in real estate and as much as 18%, depending on market conditions.
The core of the new strategy revolves around the key drivers of risk and return, including economic growth, inflation, liquidity (availability of cash) and interest rates.
“We focused on assets and returns, but not enough on the risk of our allocations,” says CalPERS board president Rob Feckner. “We’re now reaching out to the best-informed professionals of the financial world and taking all viewpoints into account.”
There is no formal timeline on when the changes will take effect, but not before the CalPERS board adopts a new targeted rate of return on its overall investment portfolio. That targeted return has been lowered to 7.38% from 7.75%. The CalPERS board is expected to ratify the final rate of return target in February or March.