The Massachusetts Pension Reserves Investment Management Board struck its first direct real estate deal in December, purchasing a 21-acre property in Santa Clara, California, for $112.3 million from the Santa Clara Redevelopment Authority.
The pension plan predicted it will save $11 million in investment-related management fees over 20 years by going direct, rather than buying the asset through a manager via a commingled fund or separate account. PRIM launched a portfolio-wide initiative in January 2013, to reduce fees across asset classes, which has saved the pension more than $146 million as of December.
Larger public pensions, such as the California Public Employees’ Retirement System, have long been direct investors in real estate. Now, some mid-size investors, such as PRIM, which manages about $6.3 billion in real estate, are also testing the space. Tim Schlitzer, PRIM’s director of real estate and timberland, told PERE that more of his peers are seeking to save on fees paid to investment managers: “In many ways, it’s an extension of what we’re already doing through PRIM’s separate accounts, which is direct ownership of properties with investment managers. We’re hoping to partner with best-in-class developers and operators, and hold these investments long-term in most cases.”
San Francisco-based private equity real estate firm DivcoWest advised PRIM on the Santa Clara transaction. However, unlike in separate accounts, advisors such as DivcoWest earn a fee from consulting on acquisitions rather than recommending the investments in a fiduciary capacity. The investors themselves underwrite and approve investments independently and advisors do not receive ongoing asset management fees.
PRIM has no specific allocations for direct real estate, but will deploy capital in core and value-add investment in diversified properties when it finds appropriate investments. Schlitzer said he will scale up the size of his staff when the scope of the investments requires a larger team, and said his team still uses advisors to help with due diligence, including legal work and underwriting.
“We think that making sure that the right team is in place is what’s most important here, despite looking for fee savings,” Schlitzer said.
Other mid-size pension systems that have gone direct for years include The State Teachers Retirement System of Ohio, which managed $8.2 billion of direct real estate as of November 30, according to data provider Real Capital Analytics.