After downsizing on its investments in hedge funds, the country’s largest public pension is setting its sights on property investment. The California Public Employee’s Retirement System is planning to increase its property portfolio by nearly $7 billion, including a 27 percent increase to its commercial real estate investments, which already totals $26 billion. This comes at a time when the company is still recovering from the recession, which had a terrible impact on real estate investments.
Now, Calpers is focusing on safer investments, such as office towers and apartments in big cities with high demand. The fund is also investing in real estate almost solely through real estate funds that have separate accounts created for Calpers, allowing it more control. The shift into less volatile real estate investments is reflective of a larger movement by big investors towards safer assets, such as treasury bonds.
In real estate specifically, the prices of high-quality properties have risen to their pre-2008 levels. However, many analysts are warning that these large price increases will not be sustained once interest rates and new construction begins to return to more normal levels. This has led the fund to pursue a goal of steady, modest gains in safer investments rather than high returns in a volatile market. However, not all big investors are following this strategy. A survey earlier this month of 231 large investors showed that nearly 75 percent of them were choosing to move to riskier investments, such as half-rented office buildings and shopping malls in transition, due to their lower price tag.
With a target allocation of 11 percent for real estate investments, Ted Eliopoulo, the Chief Investment Officer at Calpers, has stated that he is less concerned about price fluctuations and is focused more on long-term returns. The 11 percent mark is a goal, he said, but it allows some room for variation. Despite this goal, Calpers has continued to be a net seller of real estate in 2014, selling more than $688 million in real estate this year.