California State Teachers Retirement System (CalSTRS) is assessing the merits of increasing its investments in real estate operating companies, as it looks for new strategies to generate returns.
In a board meeting document, the $209bn (β¬183bn) pension fund said: βWe are studying the pros and cons of increasing or expanding those strategies.β
The investment committee is meeting this week to discuss its investment plan for the next 12 months.
Among βfuture ideasβ in real estate is increasing its βhandful of positions where we own real estate operating companiesβ.
It warned that it βwill require more staff timeβ and will be challenging to replicate the strategy on an international basis.
CalSTRS said it continued to strive to increase its exposure to real estate beyond traditional core markets.
βStaff has reasonable coverage of the US in the four major asset types,β it said. βIt is an ongoing challenge to expand these investment structures to debt investments and specialty product types like senior housing.β
The investment committee meets at a time when returns from US core real estate are expected to moderate after several years of strong performance.
The CalSTRS real estate team, led by Mike DiRΓ©, expects its portfolio to continue to generate income returns of 3-5% over the next three years, but capital appreciation is projected to drop from 5-8% to 1-3%.
βUS real estate returns have been strong for seven years driven by a recovering economy, limited construction and declining interest rates,β the board meeting document said.
CalSTRS has an absolute return objective of 7.7% for core real estate and 9% for non-core real estate, and a relative return objective of outperforming the ODCE open-ended fund index β a core US real estate benchmark β by 70bps.
βWe believe it will be a challenge to attain an 8% overall return, especially if the US economy slows down,β it said. βBeating our benchmark will also be a challenge as we are overweighting lower risk strategiesβ.
The pension fund allocates 60% of its real estate portfolio to core investments, with the remainder split evenly between value-added and opportunistic strategies.
CalSTRS has $25bn invested in real estate, representing approximately 12% of its total assets. To reach its target allocation of 13%, it would need to make close to $2bn in new invesmtents in the asset class.
The pension fund told ΒιΆΉΣ³» Real Estate that it does not typically allocate a specific amount of capital to real estate on an annual basis, but prefers to invest opportunistically.
