Blueprint: ADIA’s surprising new global real estate head, CalSTRS’ portfolio rebounds, GIC’s increased property allocation target

ADIA hires atypical global head of real estate, CalSTRS benefits from big performance swing, GIC ups real estate allocation, and more in today's briefing, exclusively for our valued subscribers.

They said it

If you think about past real estate cycles and where we’ve seen distress, they’ve largely occurred in markets and situations where the market was oversupplied. We are in exactly the opposite situation.”

Michael Arougheti, chief executive officer of Ares Management, speaking on the firm’s Q2 2022 earnings call last week

What’s new?

ADIA’s puzzling hire
In what is sure to be one of the biggest real estate hires of the year, the Abu Dhabi Investment Authority announced its new global head of real estate, Drew Goldman, last week. Goldman [his LinkedIn here], who will join the sovereign wealth fund in October, is a 23-year veteran of Deutsche Bank and most recently served as its global head of investment banking coverage and M&A. Before that, he was a global head of the company’s real estate investment banking group from 2012 to 2019. Some industry observers, however, were puzzled by the hire, given Goldman’s background in investment banking rather than real estate management. By contrast, Goldman’s most recent predecessor, Tom Arnold, worked on real estate transactions at both Cerberus Capital Management and ING before joining ADIA. Stay tuned for further coverage.

Real estate rebounds
California State Teachers’ Retirement System‘s real estate portfolio posted a 26.2 percent return in its fiscal year ending June 30, 2022, the highest returning asset class in the Sacramento, California-based investor’s portfolio. The performance has significantly rebounded from last year’s 1.5 percent return, which if not for fixed income, would have been CalSTRS’ lowest returning segment. However, real estate was the only asset class in the pension plan’s portfolio that underperformed its benchmark, with a -1.1 percent under performance against a 27.3 percent benchmark return. Still, real estate’s strong contribution to overall performance can be seen among other large US pension plans too. Real assets, of which real estate makes up 85 percent of the allocation, was the best-performing asset class in the California Public Employees’ Retirement System‘s preliminary fiscal-year results last month. Meanwhile, real estate was also a top performer for the New York State Common Retirement Fund in its fiscal year ended March 31.

Trending topics

Hitting pause
Commercial real estate investors and lenders are treading cautiously in the wake of the Federal Reserve’s move last week to increase interest rates by another 75 basis points, with market participants reporting widespread caution. “Everybody is being cautious, especially balance sheet lenders, because of the market uncertainty and so most are taking a defensive posture,” said Carl Chang, chairman of the Federal Reserve Bank of San Francisco’s Los Angeles branch board and founder of Santa Margarita, California-based Kairos Investment Management. The wait-and-see stance is creating less liquidity in the market, which Chang said will have a negative effect on the sector via lower transaction volume and more uncertainty. Read full coverage here.

The proof in the pudding
Sales data is starting to reflect market sentiment. Many conversations with market participants over the past few months have been laced with comments on repricing and deals slowing. Q2 loan issuance data is showing a drop of almost $9 billion in securities backed by real estate loans while June issuance of collateralized loan obligations was $3.6 billion – less than half of the $8.9 billion issuance in February, according to The Wall Street Journal. The squeeze on the debt markets led the number of transactions to fall 22 percent to around 8,500 during the second quarter relative to the same period last year. All of that is likely to soften pricing but investors are likely to sit tight in the hopes of a further bottoming. “Going forward, we see risk of continued downside in pricing,” Dave Bragg, managing director at analytics firm Green Street, said. “If investors agree with us, maybe it’s contributing to their reluctance to buy right now.”

Data snapshot

European logistics shows continued strength
European logistics rent growth showed immense resilience in the face of market volatility. Despite inflation becoming an issue in the back half of 2021, rent growth even relative to inflation shot up dramatically compared with the previous five years and the previous 21 years. Construction delays could create even further rent growth, LaSalle Investment Management‘s Investment Strategy Annual report contends.

People moves

UBS adds valuations specialist
UBS Asset Management has hired valuation specialist Amy White [her LinkedIn here] as its head of business management and operations, based in Dallas. White is stepping into a new role to oversee a new data implementation strategy for the Zurich-headquartered global firm, with a remit to expand the firm’s use of technology in its portfolio, PERE has learned. She brings with her a wealth of experience in valuing real estate during a period of repricing, having spent almost a decade as head of valuations for Invesco Real Estate. She also served in various chairperson roles on valuation committees for the Defined Contribution Real Estate Council and National Council of Real Estate Investment Fiduciaries. She will be shaping investment decisions for the firm, serving on both the US management team and investment committee.

Investor watch

GIC boosts RE exposure to beat inflation
GIC has beefed up its real estate exposure as part of its broader plan to grow its alternative investment portfolio to counter inflation. The Singapore sovereign wealth fund has increased its real estate allocation from 8 percent to 10 percent from the previous year, according to its annual report. It has also increased its private equity investment from 15 percent to 17 percent. Meanwhile, its exposure in public equities, bonds and cash have all dropped during the same period. The report states that the 20-year real return of its portfolio stands at 4.2 percent this year, 0.1 percent lower than the previous year. The fund believes generating real returns has become “more critical and challenging” and found real estate and infrastructure have “generally outperformed nominal bonds” in a higher inflation rate environment.

This week’s investor meetings
Thursday, August 4

Today’s letter was prepared by Peter Benson, with Evelyn LeeSamantha Rowan and Christie Ou contributing.