CalPERS is reeling from a $700 million hit taken on its residential property portfolio and is working on a plan to reduce its exposure to the toxic asset class.
High leverage, loan guarantees and a plummeting real estate market are responsible for the devastation, which the fund's board will address at a meeting in November.
“We will be doing workouts on all of the projects. Some will be held and some will be liquidated,” said George Diehr, vice president of the board and investment committee chair at the $197.6 billion California Public Employees Retirement System, Sacramento.
At the end of the review, “there will be less money in residential real estate,” Mr. Diehr said. “That goes without saying. It will come about either from the reduction in value or sales of a portion” of the residential portfolio.
Financial health of the projects in the portfolio varies; some sustained more significant losses than others, Mr. Diehr noted.
Overall, CalPERS' $2.4 billion housing portfolio suffered a 29.8% loss for the year ended March 31, according to the system's most recent real estate quarterly report. The housing portfolio represents about 10% of CalPERS' $24 billion real estate portfolio.
The board hired additional real estate consultants and advisers to help assess each project to determine whether to continue holding the property, build smaller homes on some parcels to pay down the debt or sell it off entirely. The review is expected to be discussed as part of the next quarterly real estate report at the Nov. 17 investment committee meeting, Mr. Diehr said.