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APFC to rebuild private real estate portfolio

The Alaskan sovereign wealth fund is targeting a 12% allocation to the asset class by 2025 after being a net seller in recent years.

Alaska Permanent Fund Corporation has set a new target allocation to real estate of 12 percent by 2025, according to documents from its quarterly board meeting last month.

APFC’s actual allocation to the asset class fell from 14 percent of total assets in March 2016 to 6.6 percent in March 2020 as the pension became a net seller of real estate. High valuations coupled with low cap rates created ideal conditions for the liquidation of mature investments, according to the documents.

This reduction in size of its real estate portfolio meant APFC fell below its strategic target for the asset class. It had previously intended the real estate portfolio to make up 13 percent of total assets in 2021 but now expects it to reach 7 percent next year before incrementally rebuilding the allocation to 12 percent by 2025.

The expected loss of return in the short term caused by the smaller real estate exposure would be neutralized by moderate increases in allocations to private equity, private debt and infrastructure.

To meet the new real estate target, APFC is aiming to achieve annual deployment of $500 million to $750 million via a mix of funds, direct investments and real estate investment trusts. Of the current real estate portfolio, 96 percent is invested in separate accounts and direct real estate, with just 4 percent in funds and co-investments.

The sovereign wealth fund’s investment objectives in real estate are to generate a steady cashflow stream, to create capital appreciation and to achieve greater efficiency through diversification.

APFC’s current real estate portfolio has the following sector breakdown:

Over the next five years, APFC plans to increase its exposure to multifamily and industrial sectors. Although the retail and hotel sectors are being adversely affected by the covid-19 pandemic, the multifamily and industrial sectors have remained resilient, APFC said in its meeting documents. The negative impact of coronavirus on the office sector is expected to become more acute as offices remain closed due to the pandemic.

Callan Associates, which consults APFC on its private real estate portfolio, noted “the real estate portfolio lagged behind its benchmark and ranked below the peer group median over all standard reporting periods” to March 31, 2020. As of the end of the first quarter, APFC’s portfolio produced a negative return of 0.01 percent for the fiscal year ending June 30, compared to Callan’s median return of 4.61 percent for its total real estate database for the same period.

According to the APFC’s website, the real estate portfolio is managed by four staff members, along with six external advisors – Sentinel, L&B Realty, LaSalle UK, CBRE Europe, CS Capital Management and Lincoln.

Institution: Alaska Permanent Fund Corporation
Headquarters: Juneau, Alaska
AUM: $62.62bn

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