SACRAMENTO, Calif. - CalPERS is poised to blaze new trails in real estate investing by expanding its definition of core U.S. real estate to include Canada and Mexico.
The recommendation is set for a vote at the Feb. 18 board meeting.
According to the recommendation, officials at the $133 billion California Public Employees' Retirement System, Sacramento, want to improve returns and take advantage of unique investment opportunities with current partners that already have demonstrated successful track records in the countries.
But industry experts argue the main reason for the revision is to increase the pension giant's exposure to international real estate, currently capped at 15% of the total real estate portfolio. CalPERS now has $12.2 billion invested in real estate. Of that total, just $80 million is invested internationally, in two commingled funds. One, run by Security Capital Group Inc., Chicago, invests in the United Kingdom; the other, run by Aetos Capital, New York, invests in Japan.
"They want to go international step by step and so are downplaying the difference between the three countries," said one real estate adviser, who preferred to remain anonymous.
The approach is actually an attempt to look at North America as a market, a strategy the Dutch pension funds Stichting Pensioenfonds ABP and Pensioenfonds PGGM both use, said Jacques Gordon, managing director, global investment research at LaSalle Investment Management, Chicago. "They have been in the forefront, viewing North America as a market they really need to be in. They look at the NAFTA region as one area because Canada and Mexico are so closely linked to the U.S. economically."
No other U.S. pension fund is using that strategy, according to industry consultants and advisers. But if CalPERS does adopt the expanded definition, and it's successful, it could pave the way for others to rethink their definition of core U.S. real estate.
"Most U.S. pension funds have gotten their international exposure through opportunity funds, but they have had no control on how they're weighted," Mr. Gordon pointed out. "If CalPERS invests directly under the new definition, they might outperform U.S. benchmarks."
A `technical change'
Nori Gerardo Lietz, managing director at Pension Consulting Alliance, Inc., Greenwich, Conn., CalPERS' real estate consultant, downplayed the proposed change. "CalPERS is already allowed to invest internationally in its non-core portfolio. This is more of a technical change," said Ms. Lietz.
"Some of their managers have seen opportunities in Canada and Mexico and wanted to expand the scope of the core portfolios. They are following the tenants," she explained. "Many U.S.-based corporations are expanding their operations to Mexico and Canada; the managers who have pre-existing relationships with some of those companies saw cross-border opportunities. The existing policy wouldn't permit those (properties) in the core portfolio."
In its recommendation, CalPERS staff said it will allow the fund's existing real estate managers to expand into Canada and Mexico if they have expertise there. The recommendation notes that LaSalle and Hines, Atlanta, have actively invested in Canada and Mexico, respectively.
Transactions in both countries would have to be approved by the senior investment officer.
LaSalle manages around $1 billion in industrial assets in the Eastern United States for CalPERS through its CalEast partnership. LaSalle invests in Canadian office, land, hotel and warehouse properties through separate accounts that have returned 11.08% since the program's inception in June 2000. Hines manages $2.7 billion in office properties for CalPERS through its National Office Partners partnership. Hines' Emerging Markets fund owns two industrial projects in Mexico, one in Guadalajara and one in Queretara. The firm also has been involved in the development or renovation of or investment in other properties in Mexico. Returns on Hines' investments in Mexico have ranged from zero to the upper 20% range, said Daniel MacEachron, senior vice president at Hines and portfolio manager on the CalPERs portfolio.
Paul Saylor, chairman, CS Capital Management Inc., an Atlanta-based real estate advisory firm, is negative about international real estate investing. "I'm still waiting for the first real success story on investing abroad. The United States has the best real estate market in the world, and there's no reason to go outside it unless you're expanding to something like funky debt in Japan."