In developing its new alternative investment allocations, the New Jersey State Investment Council, Trenton, which oversees the state's $67.1 billion pension, has included real estate in a new "real assets" allocation, said Kathy Hennessy, spokeswoman.
According to the council's investment policy, real assets include oil and gas, timber, commodity-linked investments and royalty trusts. The target allocation for real assets is 4% to 5%.
Some pension executives use less traditional real estate investment approaches to put the allocations to work more quickly.
Officials at the $12.2 billion Los Angeles Fire & Police Pension System are choosing to invest in REITs. The fund is searching for a manager to invest $150 million to $175 million in a REIT portfolio.
"Why REITs? It's another way of accessing the real estate allocation," said Tom Lopez, chief investment officer of the fund, which has 10% allocated and 7% committed to real estate.
It's been more difficult to invest in separate accounts, he said. "We have money for real estate we would like to invest," Mr. Lopez said. "With REITs we can pick an amount."
Officials at the $4.5 billion Sacramento (Calif.) County Employees' Retirement System have asked consultant Mercer Investment Consulting to look into alternative real estate investments, said Richard Stensrud, chief executive officer. After acting on Mercer's recommendations once the board gets them, officials expect to begin searches by the summer, he said.
Fund officials could be looking at possible investments in REITs or collateralized mortgage-backed securities, but "there are aspects of both of those approaches that are not fully satisfying," he said.
One concern is that since a downturn is expected in the REIT market, pension funds might have to hold onto their REIT investments to get value from their investment, Mr. Stensrud said. This would run contrary to fund officials' need to keep their non-traditional real estate investments liquid.
As for collateralized mortgage-backed securities, the question is whether it is really real estate or just a form of bonds. "Aren't you really just getting a bond? It is bond-related real estate, but is there a better way to get real estate exposure?" he asked.
For Sacramento County officials, alternative real estate would be more of a stopgap measure. They would prefer investments liquid enough to allow system officials to buy tangible real estate when the right investment comes along, he said.