The California Public Employees’ Retirement System, the biggest U.S. pension, plans to sell as much as $3 billion of its real estate portfolio, a move that’s part of a broader plan to reduce costs, risks and external managers.
The $303 billion fund will sell about 12 percent of its $25.5 billion real estate holdings. It won’t include any residential properties and the fund is open to offering it as a package or breaking it up, spokesman Joe DeAnda said.
Calpers is looking to sell as U.S. commercial property prices are hovering near all-time highs, having risen 12 percent in May from a year earlier, according to the Green Street Commercial Property Price Index, which measures institutional-quality properties.
“There is a wall of capital looking to invest in high-quality real estate right now, and barring any macroeconomic surprises, it is tough to envision a material decline in property values,” said Mike Kirby, chairman and director of research at Green Street Advisors LLC, a Newport Beach, California-based property research company. “As yet, there is no sign that the recent increase in interest rates has had an adverse impact, and there is a good chance that it won’t.”
The pension fund will reinvest the money in other real estate assets and managers that are more in line with its current strategy, Paul Mouchakkaa, senior investment officer, said in a statement Tuesday.
New York-based Park Hill Group Inc. has been chosen to help with the sale. The size of the sale could vary based on conditions in the real-estate market and how much it can absorb, the fund said in the statement.
The sale comes as Calpers struggles with the increasing burden of benefits promised to more than 1.7 million government workers. It has about 77 percent of the money it needs to cover pensions for state and local employees. When investment returns fall short of its 7.5 percent target rate, taxpayers need to make up the difference.
Ted Eliopoulos, the fund’s chief investment officer, said June 16 that Calpers earned 3 percent in the 10 months ending April 30 and probably won’t meet its target rate for earnings this year. Last year, the fund decided to divest its entire $4 billion from hedge funds, citing their complexity and cost.
Eliopoulos announced June 8 that he intends to reduce the number of outside managers the fund hires from about 200 to about 100 by 2020 as a way to lower how much in fees it pays to Wall Street.
Calpers has about 8.4 percent of its money in real estate, below its 10 percent target.
Calpers began restructuring its real estate portfolio after suffering a 37 percent loss in 2010, when it wrote off speculative residential investments as property values slumped. As part of the overhaul, the fund has focused on core income investments such as rental apartments, industrial parks, offices and retail space.
Investors, including foreign wealth funds, have flocked to U.S. real estate for steady yields that exceed what they can earn on many bond investments. Prime office towers in major coastal markets and apartment properties buoyed by robust rental demand have been among the most popular real estate types.
Commercial real estate sales have jumped this year. Properties valued at $238.7 billion changed hands in the first half, up 23 percent from $193.8 billion a year earlier, according to Real Capital Analytics. Foreign investors accounted for 16.5 percent of the deals this year, up from 10.3 percent in the first half of last year, according to Real Capital.