The asset class remained popular despite concerns with rising real estate prices in some areas and sectors, with many pension funds increasing their allocations.
The largest defined benefit investor in real estate equity on P&I's Top 200 list continues to be the $228.4 billion California Public Employees' Retirement System, Sacramento. Its real estate portfolio grew 80% to $16.7 billion. The leap in assets is the result of CalPERS' strategy to sell its core, mainly domestic real estate investments and slowly reinvest the proceeds in non-core and global real estate, said Brad Pacheco, spokesman.
In September, the $156.1 billion California State Teachers' Retirement System, Sacramento, increased its real estate target by five percentage points to 11% of total assets from 6%. CalSTRS is second on the Top 200 list for real estate equity investments by defined benefit plans; its $11.6 billion portfolio is up 50% from a year earlier.
The Massachusetts Pension Reserves Investment Management board, Boston, saw a 62% increase in real estate equity assets to $4.9 billion. Despite selling 10 properties during its fiscal year ended June 30, the $45.5 billion fund was a percentage point over its 10% target because of appraisal and valuation, and the 24.61% return of its real estate portfolio in fiscal 2006, according to its annual report.
A driving factor among pension executives in raising their real estate investment is the large amount of capital available, said Stan Ross, chairman of the Lusk Center for Real Estate at the University of Southern California, Los Angeles.
Investors' portfolios have also reaped some of the profits from the sale of properties by their investment managers, which has given them even more capital to reinvest in real estate, Mr. Ross said.
The problem among real estate investors and money managers is where to invest all of the capital.
Much of it is going into foreign real estate, Mr. Ross said. For example, 20% of CalSTRS' real estate portfolio is allocated to predominantly opportunistic international strategies. The $14.9 billion Illinois State Universities Retirement System, Champaign, last month added a global mandate to two active real estate investment trusts run by RREEF, America and ING Clarion Partners and to a passive REIT run by Barclays Global Investors. Officials at MassPRIM are exploring investing in international real estate, although no allocation decisions have yet been made.
Although consultants do not expect overall real estate and REIT returns to continue at current levels, they could still beat stock and bond performance — or at least provide diversification.
Adding to the diversification argument, Mr. Ross noted investors were also interested in niche strategies such as development.
Last year, the majority of pension plans' interest was "and continues to be in core but they are heavily moving into value added and opportunistic strategies," said J. Michael Fried, chief executive officer of Phoenix Realty Group, a New York-based real estate firm investing in inner-city development projects.