The California Public Employees Retirement Scheme (Calpers) has announced a further reduction in the pension fund’s real estate exposure. The sale of $3 billion in real estate holdings to a unit of the Blackstone Group LP is just the latest in the pension funds policy of reducing the number of external management companies and realigning property investments.
The assets in question included stakes in an array of international and domestic property funds and mark the beginning of the end of a difficult period for the scheme.
It is no secret that Calpers was stung by the 2008 recession having invested heavily into shopping malls and office developments just prior to the crash. It is estimated that the recession wiped out around 50% from the value of its real estate portfolio with a fall of $10 billion. As a consequence Calpers management decided to sever ties with an array of external investment managers and simplify the pension funds structure going forward.
While the $3 billion disposal is sizeable to say the least the pension fund still has around $27.1 billion invested in property. This is around 9.6% of the total fund which is currently worth in the region of $284 billion. This latest sale takes the pension funds real estate exposure below the 10% threshold target and we are likely to see further transactions in this area in due course. In many ways it is simply a shifting of investment management from external groups to a more focused management core.
While some have suggested the pension funds realignment of management arrangements is a reaction to the 2008 recession it is worth noting that the fund is currently outperforming its own three and five-year performance target by 1.7% and 0.8% respectively.
Demand for real estate
The fact that the pension fund was able to shift around $3 billion worth of assets fairly easily to one group of investors suggests the market is still fairly strong. As investors around the world wait for an upturn in worldwide interest rates it seems that many still expect long-term growth in worldwide real estate markets.
We’ve also seen a number of governments around the world looking to jettison some of their troubled loans which they were forced to acquire in the depths of the 2008 recession. Indeed the UK government has today announced the sale of £13 billion of mortgage loans acquired from Northern Rock when it was forced to step in and steady the financial markets. This is an enormous transaction with US private outfits Cerberus the buyer. It is highly likely we will see an array of similar deals in other markets as governments look to reduced tax payer liabilities as soon as possible.
While there is some concern regarding the short to medium term direction of the worldwide economy demand for real estate is still relatively strong. We have the UK government selling off £13 billion of loans acquired during the recession and Calpers continues to realign its own real estate investments. At this moment there seems to be a healthy balance of buyers/sellers although how long this will continue as we approach the eventual increase in worldwide base rates remains to be seen.