CalPERS deployed 5% of RE commitments as of September

The California Public Employees’ Retirement System continues to see a slow pace of capital deployment, according to documents from its investment committee meeting next Monday.

CalPERS committed $4 billion to existing partnerships for the 2017-18 fiscal year, which ends June 30. As of September 30, only 5 percent, or $200 million, of that capital had been deployed.

“Demand for the types of assets that CalPERS seeks was high and competition fierce,” the pension’s real estate consultant, the Pension Consulting Alliance, wrote, echoing commentary from previous reports. “Managers and staff demonstrated good discipline in not chasing acquisitions. The decision-making processes continued to be improved, which will reduce the potential for future losses.”

While some sovereign wealth funds became less active competitors for trophy assets, they were replaced by other retirement systems and other institutional capital seeking alternatives to fixed income investing, PCA managing directors David Glickman and Christy Fields noted in the memorandum.

In August, PCA said that CalPERS invested $1.6 billion of capital in real estate in the fiscal year ending June 30, well under the $4.6 billion approved for deployment. Both targeted and actual deployment in the asset class were significantly lower from the previous fiscal year, when $2.9 billion was invested in real estate, compared with $7.9 billion approved for investment, according to CalPERS’ website.

“Four or five years ago, if we gave [managers] $500 million, 50 percent would be put to work. This year, it’s looking more like 25-30 percent. Prices are moving up,” Paul Mouchakkaa, CalPERS’ managing investment director in real estate, said at the PERE Global Investor Forum: Los Angeles in April. “What does that mean for us? It’s much tighter and a more competitive situation.”

CalPERS’ real estate holdings returned 7.8 percent in the year ending December 31, above its 6.7 percent benchmark. CalPERS’ real estate performance differs from that of the benchmark in that the former’s portfolio has higher leverage levels and non-stabilized assets, as well as assets diversified by property type and geography that are not part of the benchmark.

PCA attributed CalPERS’ outperformance to strong returns from its core real estate holdings, which comprise about 79 percent of the real estate portfolio. In particular, industrial and retail property types and the system’s emerging manager programs demonstrated strong returns last year.

However, PCA expected lower core returns in the next three years compared with the last five. The firm cited a Pension Real Estate Association survey where investors forecasted 5.6 percent gross returns for US real estate in 2018 and 5 percent in 2019, compared with 6.9 percent in 2017. PCA noted that while an increasing interest rate in the US, UK and other countries is unlikely to have a major impact on commercial real estate pricing in the short term, “it does likely mark the end of the era of very strong returns for the asset class.”

The CalPERS’ spokeswoman declined to comment on the contrast between the pension plan’s strong core real estate performance and predicted lower returns for the risk type in the future.

Since September 30, CalPERS has deployed additional capital, including a $750 million earmark to Blackstone’s core-plus European platform, Blackstone Property Partners Europe, in November, according to its meeting materials. The firm held a first close on $2 billion for the open-ended fund in the fourth quarter, PERE previously reported.

Overall, CalPERS managed $351 billion, including $30.5 billion in real estate, as of October 31, according to its website.