The Florida State Board of Administration (SBA) is exploring its first investments in international-focused property vehicles, with potential commitments of up to $200 million to such strategies over the next 12 months. The overseas real estate drive is a key initiative that the $161.8 billion pension plan will be undertaking during the current fiscal year, which began on July 1.
“We live in a global economy now, so we feel it will be a good diversifier and hopefully a source of excess returns for the real estate portfolio,” said Steve Spook, senior investment officer for real estate at Florida SBA.
The real estate push outside of the US is part of a wider effort to increase the geographic exposure of the pension system, which already has gone global with most of its other asset classes. And, in going global, Florida is following the example of other large US pension systems, which already have been making international investments for some time.
The SBA currently has no investments in regional or country-specific real estate funds outside the US, and it has less than five percent of its property portfolio allocated to global real estate funds such as The Blackstone Group’s Blackstone Real Estate Partners VI and VII, Rockpoint Group’s Rockpoint Real Estate Fund III and Starwood Capital Group’s Starwood Distressed Opportunity Fund IX. While all of those funds have an exposure to non-US real estate, the majority of their investments have been domestic.
Florida hadn’t invested in dedicated international property funds earlier because of its historically strong emphasis on core investing. In recent years, however, the pension plan revised its opportunistic allocation target to 15 percent of its real estate holdings, but with an investment range that could go up to 30 percent. In addition, “the very tough core pricing environment in the US, in our opinion, is just not making for a lot of attractive opportunities today,” Spook added.
The SBA currently is considering putting a cap of 15 percent on overseas investments within its private real estate portfolio. “We’re obviously going to try to educate ourselves as much as we can before we make any investments, but really one of the best ways to learn about different markets is to actually be invested over there,” Spook said.
The pension plan first began conducting research and interviewing international real estate managers during its fiscal year 2011-12. “If we decide to invest, we expect that we will have sufficient information and education to do so this year,” said Spook. If it indeed does proceed, the SBA likely would commit about $200 million over the coming year, with individual commitments of approximately $50 million.
Spook and a colleague recently returned from a due diligence trip to Asia, where the two met with numerous managers in Japan, China and Hong Kong. “We’re still in the phase of trying to assess where the opportunities are in Asia,” Spook said. “We do think there’s opportunity in the region.” In fact, he anticipates that SBA’s first non-US international commitment would be to an Asia-focused vehicle because of the amount of due diligence it already has done on the region.
Meanwhile, the pension system is getting up to speed on opportunities in Europe. “With the distress that’s going on in Europe, there’s going to be a lot of opportunities for fund managers to make good investments,” said Spook, who anticipates that he will be traveling to the region in the next couple of months to meet with managers and better understand the various markets.
The SBA already made a trip to Brazil last year, but it currently is evaluating what the country’s recent “tremendous” slowdown in growth will mean for investment opportunities. “They really have gone from a fairly high growth economy to pretty flat right now,” Spook noted. “That doesn’t mean there’s not opportunities, it’s just a different landscape than it was a year ago.”
While other Latin American economies such as Colombia and Peru present attractive opportunities, most of those markets don’t have sufficient scale for the amount of capital Florida would be seeking to allocate. “Doing anything country-specific other than Brazil – and, maybe in the future, Mexico – doesn’t seem to make a lot of sense at this point,” Spook explained. “They’re going to tend to be a lot smaller funds and a lot thinner markets.”
The SBA is embarking on its international real estate expansion in the wake of more than $1 billion in direct investments and commingled fund commitments over the past two fiscal years – putting it ahead of its original goal of investing $1 billion in property over a three-year period. However, the pension plan, which currently holds about $10 billion in real estate, doesn’t have a similar allocation goal for the current and upcoming fiscal years.
“We don’t have any pressure to put out another billion over the next year or two necessarily,” said Spook. “We’re well positioned right now versus our targets and allocations. We can be very opportunistic with our commitments going forward.”