It is unlikely that CalPERS' $25.6 billion real estate portfolio will be able to sustain the strong returns produced in the last three years, said a report by the $296 billion pension fund's real estate consultant, Pension Consulting Alliance.
The real estate portfolio for the California Public Employees' Retirement System, Sacramento, had annualized returns of 13.4% for the three-year period ended Sept. 30, 148 basis points above CalPERS' custom benchmark, CalPERS statistics show.
The PCA report, which is contained in agenda materials for CalPERS' Nov. 17 investment committee meeting, said sustaining those returns is unlikely because of a challenging and highly competitive investment market.
The report cites increased competition from sovereign wealth funds, high-net-worth investors and other large direct investors in real estate as among the reasons for the potentially declining results. It says persistently low interest rates are fueling the demand for income-producing assets.
In 2011, CalPERS changed the focus of its real estate program to focus on investing in income-producing properties — and away from opportunistic real estate — after suffering massive losses following the crash of the real estate market.