CalPERS’ Real Estate Value to Slide Another Year

By Jon Peterson

The multi-billion-dollar real estate investment portfolio held by California’s huge public pension fund has dropped an additional 16 percent in the last year and is expected to continue downward for another year at least, according to real estate advisor Pension Consulting Alliance.

CalPERS’ real-estate portfolio had a market value of $14.7 billion at the end of March, down $2.9 billion from the same time time in 2009, the consultant said. PCA attributed the fall to capital markets; the macro economy and the downward pressure on rents; the fund’s exposure to unstable assets; and debt, which magnifies gains and loses.

The decline has been offset to a degree by new equity to de-leverage assets, the consultant said. CalPERS’ real estate staff declined to provide additional details on the equity infusions.

Oregon-based PCA expects another poor year for real estate in the fund. In a memorandum to CalPERS’ investment committee, the consultant said, “Persistently weak economic conditions, the absence of a functioning commercial mortgage origination/refinancing market and negative leverage are likely to erode income streams and total returns.”

Going forward, CalPERS is looking for “solid income-generating investments,” Information Officer Clark McKinley said in an email. The fund is less interested in projects with “payoff 10 years out,” McKinley said.

In that light, CalPERS expects to shy away from opportunistic deals such as those it invested in during the last cycle. The track is one many pension funds around the country are choosing. The vast majority of commitments to real estate so far in 2010 by pension funds has been in low-risk, core strategies. Pension funds want to be conservative with their real estate investments until the economy improves.

CalPERS’ is actively transferring assets from partnerships that have ended to new partners, the consultant reports. The moves have been well anticipated. The pension fund does not identify funds or fund managers who are removed from its accounts, except on rare occasions, spokesman McKinley said, citing StockBridge Real Estate Funds’ assumption last year of Victor MacFarlane’s California Urban Investment Partners. Both companies have offices in San Francisco.

“As I think you understand, there are contractual, legal and proprietary reasons why this restructuring is mostly out of the public eye,” McKinley said.