The Employees Retirement System of Texas is targeting $1.25 billion in commitments to private real estate over the next four fiscal years. Of that amount, $700 million will be directed to non-core property strategies.
Under its private real estate annual tactical plan for fiscal year 2016, which would begin on September 1, the $25.9 billion pension plan would commit $200 million to between two and 15 deals, all of which would be in non-core real estate strategies. The fiscal year plan, which was approved at ERS’ board meeting this week, would call for investments in commingled funds or club deals where the pension system would be able to drive terms and conditions, as well as co-investments, separate accounts and programmatic joint ventures.
The public institution would also be looking at niche fund types such as medical office, self-storage, manufactured housing, student housing and senior housing. Such property types “may provide significant yield premiums,” Dan Krivinskas and Mark Bartmann of RVK, the pension plan’s real estate consultant, wrote in a presentation to ERS. These strategies could potentially represent $35 million to $100 million of commitments in the new fiscal year, the pension plan said.
Other fiscal year 2016 initiatives included investing in Asia and potentially in Latin America. “Demographic growth trends in India and Turkey could create compelling investment opportunities in the coming years, given their limited stock of institutional quality real estate,” Krivinskas and Bartmann wrote. However, “investors must be patient to find the best investment opportunities.” As of December 31, the pension plan’s private real estate portfolio was 80 percent invested in the US and 20 percent overseas.
Subsequent to fiscal year 2016, ERS has proposed committing $300 million to private real estate in 2017, $425 million in 2018 and $275 million in 2019. Non-core real estate would account for $200 million of the allocation in 2017, $225 million in 2018 and $75 million in 2019.
ERS’ private real estate portfolio currently has a net asset value of $1.5 billion, with 85 percent in equity and 15 percent in debt. In the current fiscal year to date, which ends on August 31, the pension system has committed $331 million to six deals. ERS, which currently has 5.8 percent of its total assets allocated to private real estate, is projected to reach a seven percent allocation target by next fiscal year.