The California State Teachers Retirement System (CalSTRS) plans to take steps to further diversify its real estate portfolio outside the US during fiscal year 2013-14, which began earlier this month.
“What we’re looking to do is re-look at international investments but lower-risk ones, those that are value-added or even core,” said Mike DiRé, director of real estate at CalSTRS, in an interview with PERE. Some 97 percent of the pension system’s property investments overseas currently are opportunistic, he noted.
Historically, the bulk of CalSTRS’ international real estate investments were made through global opportunity funds. However, as distributions from those opportunity funds have been returned to the pension plan, its overseas real estate holdings have declined from their peak in the mid-20 percent range to around 15 percent currently.
“We’re concerned about the level of international investments that we have, that we are less diversified internationally than we were before,” DiRé said. “We’re going to the board to discuss a strategy to diversify internationally, and we likely would include a higher allocation to non-opportunistic international investments.”
In the past, non-US property investments overwhelmingly were considered opportunistic, just because they were done overseas and therefore deemed higher risk, DiRé explained. “When we were more heavily weighted to opportunistic, it was more appropriate to diversify internationally,” he said. But with a lower weighting to opportunistic in its overall real estate portfolio, CalSTRS likewise has pulled back on higher-risk investments abroad.
The pension plan began increasing its core real estate holdings and scaling back its opportunistic and value-added investments during its fiscal year 2011-12. CalSTRS currently has a risk goal of 50 percent core, 20 percent value-added and 30 percent opportunistic.
In terms of value-added or core international strategies, “I think we have seen it growing,” said DiRé. “The offerings have changed overtime.” For example, he noted that there are a number of core open-ended funds in Europe and Australia, and that some firms are considering similar offerings for Asia. “By taking less development risk, leverage risk or lease-up risk, you can lower the risk premium.”
That said, DiRé acknowledged the difficulty of finding open-ended core funds outside of established markets such as Europe and Australia. “There are not a lot of choices for us to invest into core open-ended funds,” he said. “It’s the same thing for value-added.” And while the pension system has the opportunity to make direct investments internationally through joint ventures and separate accounts, doing so would be more challenging than in the US, where CalSTRS has the benefit of physical proximity and common language with its partners to invest directly with more confidence.
“It’s no secret that we desire higher levels of control,” DiRé said. “But whether or not we can execute levels of control efficiently and appropriately overseas is a real question mark. As we build our program over time, it’s logical for us to start with a fund or club deal that allows us to learn before we start to have more direct control over assets.”
DiRé stressed that CalSTRS’ approach to international real estate investments was a long-term strategy, not “a quick turnaround.” He noted that the pension plan – which committed $75 million earlier this year to Paladin Realty Partners’ Paladin Realty Latin America Investors IV – is considering additional investments, but it has not set any specific goals or targets for overseas property investments. “We’re going into it with a wide-open viewpoint to see what’s available out there,” he added.
DiRé said he anticipates that CalSTRS would meet with its board as well as its real estate consultant, The Townsend Group, to develop a more defined international real estate strategy over the new fiscal year. “Right now, it’s more big picture than specifics,” he said. “There will be more specifics down the road.”
CalSTRS currently has invested $22.3 billion, or 13.6 percent of its overall portfolio, in real estate. It is seeking to lower its property allocation to 12 percent through the continued sale of assets out of the portfolio and by encouraging fund managers to liquidate investments.