CalPERS’ RE allocation falls by 50% in two years

Mirroring a larger trend among public pension plans, the California Public Employees’ Retirement System’s earmarks to the asset class have significantly declined amid a challenging investment environment.

The California Public Employees’ Retirement System has cut its real estate allocations by half in the last two years, reflecting a trend in lower commitments to the asset class by US public pension plans.

The country’s largest pension system, which managed $30.5 billion in real estate as of June 30, said it will invest about $3.95 billion during its fiscal year that began July 1, according to board documents for its Monday meeting. That number reflects a 50 percent drop in CalPERS’ real estate commitments, having planned to invest $4.6 billion in the 2016-17 fiscal year and $7.9 billion in the 2015-16 fiscal year, PERE previously reported.

CalPERS’ sharp decline in real estate commitments mirrors an ongoing decrease in public pension systems’ allocations to the asset class, according to a second-quarter report from FPL Advisory Group, a Chicago-based consultancy. Pensions committed $15.4 billion to real estate managers in the first half of 2017, compared with $21.9 billion in H1 2016 and $24.6 billion in H1 2015.

The pension system’s diminished allocations to real estate come at a time when its annual deployment in the asset class has also plummeted. Out of the $4.6 billion approved for 2016-17, only $1.6 billion was deployed, its property consultant said at last month’s meeting, PERE reported. Both the targeted and actual deployment in the asset class were significantly lower from the 2015-16 fiscal year, when $2.9 billion out of an approved $7.9 billion was actually invested.

“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.”

In its most recent round of earmarks for the 2017-18 fiscal year, CalPERS is re-upping with nine existing managers, according to meeting materials. Some of those commitments have remained relatively unchanged in size from the previous fiscal year. For example, the pension system’s biggest real estate check for the fiscal year is $1.2 billion for Fifth Street Properties, an office-focused joint venture managed by CommonWealth Partners. During the previous fiscal year, CalPERS allocated $1.25 billion to that partnership – which was valued at $3.8 billion and generated a net 14.2 percent return as of June 30.

Another major recipient of this year’s allocations will be Institutional Mall Investors, a JV overseen by Miller Capital Advisory that was valued at $6.2 billion and returned 9.7 percent in the fiscal year ending June 30. CalPERS is setting aside $1.1 billion with IMI, slightly larger than the $1 billion it reserved for the partnership last year.

Other earmarks included $400 million to Global Retail Investors, run by First Washington Realty; $350 million to Institutional Logistic Partners, managed by Bentall Kennedy; and $300 million to TechCore, overseen by GI Partners. For the year ending June 30, those partnerships returned 11.5 percent, 10.4 percent and 14.5 percent, respectively.

CalPERS’ real estate portfolio returned 7.6 percent in the year ending June 30, outperforming its benchmark by 24 basis points.

The pension system overall managed $323.5 billion as of June 30. Its portfolio returned 11.2 percent in the 2016-17 fiscal year, 15 basis points below its benchmark.