CalPERS' real estate consultant warned pension fund officials must maintain their “disciplined approach” to underwriting in the “overheated market.
In a report presented to the $298.6 billion California Public Employees' Retirement System's investment committee on Monday, Pension Consulting Alliance said enormous amounts of capital are being allocated by global investors to commercial real estate investments. “These investors, many of whom have different thresholds than CalPERS to describe acceptable risk-adjusted returns, have been joined by non-traditional property investors such as hedge funds … looking to take money off the table and place profits into what is perceived as less volatile assets.”
PCA consultant David Glickman, who wrote the report, said the effect on real estate prices “has been material,” with many asset values exceeding the record levels observed before the financial crisis.
“PCA cautions to not confuse brains with a bull market in expecting these increases in values to be sustained when interest rates and new construction start to return to more normalized levels,” Mr. Glickman said.
The Sacramento-based pension fund has about $26 billion in real estate.
Mr. Glickman said CalPERS' strategic shift to less risky real estate investments has resulted in improved performance as of late.
He said its real estate portfolio outperformed its custom benchmark for the quarter ended June 30, returning 8.4%, vs. 2.3% for the custom benchmark. He said the portfolio returned 13.9% for the year, vs. 12.7% for the benchmark.