CalPERS considers 5x expansion of emerging markets RE

The California Public Employees’ Retirement System is considering a five-fold expansion of its investments in emerging market real estate.

Investment staff at the $234.2 billion (€158.2  billion) pension have recommended allocating up to 20 percent of the fund’s real estate pot, valued at $23.6 billion, to emerging markets over the coming decade – with China and India among the favored countries.

Emerging market investments currently account for only 3.6 percent of total real estate allocations, compared with 83.8 percent for developed North America, 6.8 percent for developed Europe and 5.7 percent for developed Asia.

Of the investments already made in emerging markets, around a third goes to India, a fifth to Mexico and Brazil respectively and roughly 15 percent to China.

A report by Pension Consulting Alliance and PCA Real Estate Advisors recommends China and India as “highly attractive” locations in which to invest. The report said Brazil, Mexico and Turkey were “attractive” areas to invest in, but was “neutral” on countries such as Russia, South Africa, Poland and Hungary. Argentina was the least attractive country for investment.

The pension will consider the plans – part of the pension’s strategic review of the real estate asset class over the next five to 10 years – at their investment committee and policy subcommittee meetings on August 18. Investment officials have proposed investing up to 20 percent of the fund’s 10 percent target allocation to real estate to emerging markets and up to five percent to frontier markets such as Bulgaria, Lebanon, Africa, and Vietnam.

The report by PCA said emerging markets were experiencing higher economic growth than developed markets and were expected to “continue to outperform” markets such as the US and Western Europe. It went on to add that growth in the size of urban workforces and demographics were helping drive demand for real estate. Reporting on China and India, the report added: “While some investors are concerned with the real estate capital flows into the region, the vigorous growth of the overall economies – and faster growing real estate markets within them – appear to be justifying continued investor interest.”