The North Carolina Retirement System is scaling back on non-core real estate investments while boosting the amount of capital it will be investing in lower-risk property deals. The changes are part of the institution’s overall objective to reduce its strategic property target.
According to its new strategic asset allocation policy, North Carolina will now allocate 3 percent of its total assets to non-core real estate, down from 4.3 percent. Meanwhile, the pension plan will be raising its core real estate allocation to 5 percent, up from 3.7 percent. Its actual allocation in non-core real estate was 4.8 percent and 3 percent in core real estate, as of May 13. These changes are part of an overall reduction in the pension plan’s property allocation target to 8 percent, from a transitional target of 8.44 percent.
According to a draft investment policy statement, the state’s non-core real estate portfolio primarily consists of global equity and debt investments in commercial and residential real estate through external investment managers and vehicles, while its core portfolio comprises predominantly US equity and debt investments in core commercial real estate. While the investment objectives of both property portfolios include attractive absolute returns, competitive relative returns and diversification, the core portfolio also has the additional objectives of inflation protection and capital preservation.
Effective July 1, the start of its new fiscal year, North Carolina will strive to increase the private equity component of its core real estate portfolio through separate accounts to improve both investor control and cost effectiveness. Such separate accounts will pursue demographic trends such as medical office and senior housing. The pension plan also will consider “compelling” co-investments and club deals from time to time because of reduced fees and the ability to see attractive deal flow from existing managers.
Other attractive real estate opportunities for the pension plan include the acquisition and development of industrial properties through non-core separate accounts; and investing in European debt and equity through an existing mandate launched last year to capitalize on distressed owners and lenders. Meanwhile, less attractive property subsectors were identified as prime core in major markets and multifamily acquisitions.
Since its last investment advisory committee meeting in February, North Carolina made one real estate investment, committing $100 million to Angelo Gordon’s AG Net Lease Realty Fund III in April. Angelo Gordon raised a total of $1 billion for the value-added fund, which focuses on the acquisitions of net-leased corporate real estate properties in the US and overseas.