The New Mexico State Investment Council (SIC) has approved an intermediate allocation target of 7 percent to real estate, which will allow the endowment to make additional investments in the asset class. The state’s target allocation is expected to increase by approximately 1 percent each quarter to 10 percent by the end of 2012, pending the council’s approval.
Last July, New Mexico adopted a long-term allocation target for real estate of 10 percent. In February, the council approved an increase in the allocation target from 5 percent to 6 percent.
Following the end of the fourth quarter, New Mexico made five core real estate commitments totalling $410 million. These included a $75 million commitment in March to Heitman’s HART, a open-ended core fund focused on apartments, retail and other property types; a $35 million commitment to Clarion Partners’ Lion Industrial Trust, an open-ended core vehicle focused on industrial assets; and an additional $75 million to Prudential Real Estate Investors’ PRISA, an open-ended fund to which the state made its first core commitment in 2011.
The capital for those commitments is expected to be deployed over the next four to six quarters, in line with the increased real estate allocation. The higher allocation target, along with the planned disposition of assets in New Mexico’s opportunistic real estate portfolio, will provide capacity for additional investments, particularly in core real estate.
The fourth quarter net return on SIC’s real estate portfolio was 3.8 percent, compared to a 2.7 percent for the NFI-ODCE index, marking the first time the endowment had outperformed the benchmark since 2009, according to its fourth quarter performance report. The best performing investments were CIM Real Estate Fund III and Beal SIC Holding, the report noted.
Longer term, however, the portfolio continues to lag the benchmark, as a result of significant underexposure to lower-leveraged core properties, significant overexposure to higher-risk, higher-leverage non-core investments and a concentration of fund investments in poor performing vintage years.