Pension funds increased their investment in real estate in 1995.
Really, they did, say industry professionals.
Data compiled by Pensions & Investments would seem to contradict that conclusion, but it is very likely pension fund investment in real estate is understated in P&I's annual pension fund directory.
For the year ended Sept. 30, pension fund investment in equity real estate by the top 200 pension funds totaled $51.3 billion, a 4.7% increase from the $49 billion reported one year earlier. But during that period, the total return of the properties in the NCREIF Property Index - the most widely used benchmark for measuring pension fund investment in real estate - was 8.3%, resulting in a net decline of about 3%.
No way, according to the real estate consultants that have conducted searches for their pension fund clients.
Barbara Cambon, president of Institutional Property Consultants, San Diego, estimated pension funds invested $4 billion in private equity real estate in 1995, with the largest part of that going to opportunistic funds.
Among pension funds making investments in opportunistic funds in the 12 months ended Sept. 30 were: the $70 billion New York State and Local Retirement Systems, Albany; the $33.4 billion State Teachers Retirement System of Ohio, Columbus; the $20 billion Oregon Public Employes' Retirement System, Salem; the $39 billion pension fund for IBM Corp.; and the $57 billion pension fund for AT&T Co.
In addition to private equity real estate investments made directly or through commingled funds, several pension funds hired separate account managers for investment in real estate investment trust securities, said Jeffrey Ennis, senior associates with Wilshire Associates, Santa Monica, Calif.
Pension fund REIT investors during the period include the $49.4 billion New York State Teachers Retirement System; $2.2 billion San Diego County Employees' Retirement Association; and the $8.5 billion Iowa Public Employees' Retirement System.
In other instances, pension funds made private placement investments in preferred securities of REITs, some of which are convertible to common shares and would make them significant shareholders of real estate operating companies.
Also, some pension funds finally began to fund allocations to real estate that were established years ago but were suspended during the depression that lingered over the property markets in the early 1990s. This too, consultants said, has made for increased real estate investment by pension funds.
Finally, a lack of disclosure to P&I by some of the most active pension fund real estate investors in 1995 may have caused further underestimation. The pension funds for General Motors Corp., IBM Corp., Ameritech Corp., California State Teachers' Retirement System and the Detroit General Retirement Systems declined to disclose their real estate investments, but there is loose consensus among industry observers that these funds were active real estate investors during 1995.
For example, the $72 billion General Motors Investment Management Corp. last July invested between $55 million and $60 million in a portfolio of research and development properties in California. In August, the fund paid an undisclosed amount for a Minneapolis office building.
Pension funds with less than $5 billion in total assets were more likely to have lost money or decreased their investment in real estate, according to the P&I data. Funds with more than $5 billion increased their investments in real estate, according to the data.
Many of the funds that showed significant gains in real estate investments finally began to fund commitments that were made years ago but were not funded because real estate values were dropping in the early 1990s.
Many of these recent investments are characterized by new ideas and innovative strategies that were unavailable during the pension real estate rush of the 1980s.
The $16.7 billion GTE Corp. pension fund, Stamford, Conn., is one such example of a pension fund that was out of the market during the early 1990s. The fund increased its equity real estate investment by 196%, rising to $335 million from $113 million, according to the P&I data.
P&I learned GTE invested $150 million in a separate account with Boston-based Fidelity Management Trust Co. for its four quadrant real estate program. Four quadrant investing has been one of the hottest strategies in the reinvigorated real estate industry, with most of the large real estate money managers claiming to be able to provide the capability.
GTE also made a significant investment with Los Angeles-based Westmark Realty Advisors, industry sources said. Carol Tusch, investment team leader, declined to comment.
Real estate investments by the $25.8 billion pension fund for E.I. du Pont de Nemours & Co. Inc. grew 217% to $457 million from $144 million, P&I data show. Among the more innovative deals by the Wilmington, Del., fund was its co-investment with public REIT developers Diversified Realty Corp. to buy a power center portfolio from Sears, Roebuck & Co. for more than $500 million.
The $20 billion Los Angeles County Employees Retirement Association's real estate investments rose 71% to $953 million, the P&I data show. The Pasadena-based pension fund invested $150 million with Lowe Enterprises to build entry-level single-family housing nationwide. Few pension funds have invested in single-family housing, and fewer still have undertaken a program to do it throughout the country.
Los Angeles County also invested $200 million in separate accounts with existing real estate managers.
Other large gainers in real estate investments include the $19.2 billion State Retirement and Pension System of Maryland, Baltimore, rising 244% to $526 million from $153 million; and the $5.4 billion Ohio Police and Firemen's Disability & Pension Fund, Columbus, growing 94% to $360 million from $186 million.
Although its 18% increase in real estate investments was modest compared with other big gainers, the $28.7 billion State of Michigan Retirement Systems, Lansing, was probably the most innovative. The fund paid $200 million and pooled its apartments with a Denver developer to form Simpson Housing L.P.
Philip Van Syckle, administrator-mortgage and real estate for the fund, said the strategy allows the fund to be a master of its own destiny. In addition to controlling the new company's board of directors, the retirement system's partner has more than $50 million of equity remaining in the deal, which is guaranteed to "hold the attention of the officers to manage the company and make profits," said Mr. Van Syckle.
The fund could gain liquidity for its properties by selling a portion to another investor - an expression of interest already has been made - or by taking the portfolio public.
The structure also may be a precursor of how Michigan will manage its other real estate investments. The fund is considering pooling its other properties into property specific trusts.
Among fund's registering declines in real estate investments, the $2.7 billion pension fund for Owens-Illinois Inc. led the way. The Toledo, Ohio, pension fund's real estate investments dropped 85% to $22 million, from $148 million a year ago. Telephone calls to Ronald C. Boller, vice president-investments were not returned.