SACRAMENTO, Calif. -- The California Public Employees' Retirement System will start taking a slightly defensive position with the more than $4.3 billion core part of its $6.9 billion real estate portfolio -- the largest single real estate portfolio of any pension plan in the United States.
CalPERS' 18-month real estate investment plan calls for increasing investment in warehouses to the upper end of the trustee-approved range of allowable investment percentage, to 25% from 14.9% of the core portfolio. The plan also calls for increased investment in local shopping centers anchored by supermarkets. At the same time, the $151 billion retirement system will begin to decrease its reliance on regional malls.
The core portfolio is made up of traditional real estate investments, not specialized such as timber, hotels and opportunistic investments.
And despite a booming real estate market, "At this point in the real estate cycle, I believe it is more prudent to position the (real estate) portfolio with a slightly more defensive posture," said Guy F. Jaquier, CalPERS' new senior investment officer for real estate.
The pension fund wants to invest in areas with above-average market growth and more economic stability than in other areas. Regional malls, Mr. Jaquier said, are more sensitive to economic recessions than are warehouses and supermarket-anchored shopping centers.
The NCREIF Property index has had three strong years, with a total return of 16.14% in 1998, and an annualized return of 13.43% for the three years ended Dec. 31.
Sean Keene, a real estate consultant for Callan Associates, San Francisco, said pension funds that he knows of aren't taking defensive positions. The core real estate market is stable, he said. Supply and demand for space are in "equilibrium."
With a similar view on supply and demand, Mr. Jaquier noted that average occupancy is in the range of 95% or higher, compared with an 83% average for office buildings in the early 1990s.
However, Mr. Jaquier said, the "current risk is not overbuilding, but a slowdown in the U.S. economy."
U.S. real estate, he said, has benefited from a strong economy and low inflation for eight years and core real estate is in a mature phase after a four-year bull market.
Mr. Jaquier cited the Emerging Trends in Real Estate 1999 report that said a deep recession in the U.S. would reduce demand significantly. The report, by PricewaterhouseCoopers and Lend Lease Real Estate Investments Inc., is based on in-depth interviews with 150 institutional investors.
During the real estate recession of the early 1990s, warehouses and shopping centers anchored by supermarkets outperformed the average returns on real estate, Mr. Jaquier said. CalPERS' real estate portfolio is so large it is prudent to start moving it to a more defensive posture, he said.
CalPERS' real estate staff also intends to focus on high-return opportunities and investment structures in specialized real estate. The specialized portfolio has a minimum allocation range of 30% of the system's entire real estate allocation, but is probably less than that now, Mr. Jaquier said.
CalPERS' core real estate portfolio outperformed its specialized portfolio in 1998. The core portfolio returned 18.4% for the year, while the specialized portfolio returned 8.6%. The Trust Universe Comparison Service, a performance universe, returned a median score of 12.8% for the year.
The 1998 results were almost a reverse of earlier years. For the three years ended Dec. 31, CalPERS' core portfolio returned 11.8% and its specialized portfolio, 15.9%.
According to Sheryl Pressler, chief investment officer of the fund, the system has focused on core real estate for the past couple of years and hasn't developed new strategies for specialized real estate.
The new specialized studies will include reports on expanding international real estate, senior housing and agricultural investments.
CalPERS now has only about $100 million in international real estate. But the fund's international study will look at real estate investments in Europe, Asia and Latin America, Mr. Jaquier said. He declined to say how much additional money he would like to invest in international real estate.
But, he said, he wants to develop a strong "network of relationships" concerning real estate. "I consider this very important as we consider investing offshore."
In addition, CalPERS will study a proposal to expand its investment in real estate in urban core areas. California's new state treasurer, Philip Angelides, has called for such investments.