CalPERS investment committee on Monday will discuss whether to increase leverage to 50% in its $8 billion core real estate portfolio, a move that could boost returns by 100 to 125 basis points a year while adding significant risk. The loan-to-value ratio for the core portfolio was increased to 40% in August, from 25%.
Staff at the $149 billion California Public Employees Retirement System, Sacramento, said low interest rates make using debt attractive. For example, a 10% internal rate of return for unleveraged investment would increase to 12.33% at 40% leverage and 13.5% at 50% leverage, the staff noted in a memo. Use of higher leverage also would free up about $3.2 billion in additional core investment capacity. But higher leverage would make the portfolio more volatile and could reduce cash flows and increase refinancing risk, the staff noted.