Are Pension Funds Warming Up to CRE Again?

The news of late from public pension funds would indicate that they may be warming to commercial real estate again -- even after taking a beating on those investments over the past couple of years.

In the past couple of weeks, pension plans both in the United States and Canada have been showing up as buyers in trophy properties, pumping money into new investment funds and lining up joint venture investors and partners in other deals. Yet those individual deals have been trumped by the Employees Retirement System of Texas, which in the same time frame, has revealed plans to increase its commercial real estate portfolio to up to $1.7 billion from about $460 million. The increase allocation for investment is to occur over the next five years, but with the bulk of the allocation set to be spent this year and next.

The goal of the $21 billion Employees Retirement System of Texas (TERS) is to have a new private real estate account make up 6% of the its overall investments, with public real estate making up another 2%.

As of Feb. 23, 2010, TERS' private real estate portfolio was at $0. Thus the public pension fund said it expected to spend between $405 million to $675 million this year and from $330 million to $550 million next year to launch the fund.

The fund revealed that its real estate staff and consultants believe that this year as well as 2011 and 2012 will be vintage years for real estate investment. As such, the proposed commitment pace has been accelerated primarily to take advantage of potential mispricing and distressed selling in the real estate market expected over the next several years.

Significant capital appreciation returns may be realized if the real estate market rebounds in subsequent years and would be foregone if the commitment pace were slower, according to a first quarter agenda items made public by the fund.

This accelerated commitment pace is not without risk, according to the fund. Underperformance of 2010, 2011 and 2012 vintage year funds, in particular, would leave the real estate portfolio significantly vulnerable if these vintage year funds underperform. TERS said it would adjust its commitment pace based upon fundamental changes occurring in the real estate market, watching for such things as capitalization rates peaking, interest rates rising and new construction increasing.

The following is a summary of TERS's stated acquisition criteria.

• All assets must be of "institutional quality," defined as being acceptable by other prudent institutional investors (e.g., insurance companies, commercial banks, and similar other government funds.


• Assets will consist predominantly of private real estate investments primarily within the office, multifamily, retail, industrial, and hotel property types.


• The portfolio will be diversified as to risk/return mixture, geography, property type, investment vehicle, investment leverage, vintage year, and investment manager. And


• Core investments will make 35% of expenditures (+/- 10%); value-added, 25% (+/- 10%); opportunistic, 15% (+/- 10%); global publicly traded real estate securities, 25% (+/- 10%); and infrastructure, 0% - 10%.

Other state and government pension funds have been active regarding their real estate investment plans lately as well.

Canada Pension Plan

This week, the Toronto-based CPP Investment Board (CPPIB), investment management organization that invests funds on behalf of the Canada Pension Plan, announced its first real estate investments in Manhattan with the acquisition of ownership stakes in two prime commercial office properties.

CPPIB agreed to acquire a 45% ownership interest in 1221 Avenue of the Americas from SL Green Realty Corp. for $576 million including debt and working capital. In addition, CPPIB has formed a joint venture with SL Green to acquire a 45% ownership stake in 600 Lexington Ave. for a total consideration of approximately $87 million.

In total, these properties have a combined value of over $1.45 billion representing a gross consideration of approximately $663 million.

"We believe it is an attractive time to enter the New York market," said Peter Ballon, CPPIB's vice-president and head of real estate investments - Americas. "These transactions reflect CPPIB's growing reputation as a major global real estate investor with the capital, and more importantly, the internal capabilities to directly participate in large complex transactions such as these."

"We remain focused on our U.S. real estate investment strategy, which is to acquire premier commercial properties in key markets by partnering alongside top tier partners such as SL Green and Rockefeller Group," Ballon added.

Separately this quarter, CPPIB and Kimco Realty Corp. established a new joint venture, which acquired five retail properties for approximately $370 million including $160 million of mortgage debt. This portfolio, which totals approximately 2.1 million square feet, is primarily grocery-anchored centers including three centers in California, and one each in Florida and Virginia. CPPIB and Kimco intend to grow this joint venture over time through the acquisition of additional retail properties or portfolios.

Oregon Public Employees Retirement Fund

Late last month, the Oregon Investment Council, which directs investments for the Oregon Public Employees Retirement Fund (OPERF), approved a $100 million investment in Vornado Capital Partners LP.

The fund is a new investment vehicle formed by Vornado Realty Trust that is looking to raise $1 billion to invest in high quality office properties in such cities as New York and Washington, DC. The fund is 'value-add' in nature with a target gross internal rate of return of 15% to 20%. It is Vornado's first such fund with institutional investment limited partners.

According to OPERF documents, Vornado said it believes the next few years will offer "an exceptional opportunity to invest in quality real estate investments as current owners and lenders address the property re-pricing of the recent past. Some of these opportunities may be of a size that exceeds Vornado's REIT resources." And OPERF indicated that the size of the opportunities would be too large for its concentration limits on a stand-alone basis as well.

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