US pension fund acts after property portfolio’s value falls from $17.6bn to $13.5bn in six months
US pension giant The California Public Employees’ Retirement System (CalPERS) is culling its external real estate managers. According to CalPERS’ adviser, Pensions Consulting Alliance, the review process is well under way and “a number of managers have been, or are in the process of being, terminated, as their performance and judgment has proved to be well below expectations”.
The move is a sign of many domestic and international investors’ deep unhappiness with the performance of their fund managers and general partners over the past two years. CalPERS has “core partner-ships” with 10 external real estate managers, including well-known global names such as BlackRock, RREEF, LaSalle Investment Management and Hines.
CalPERS also has a 20-strong roster of “non-core partner-ships” with other managers, mainly involved with California urban real estate and housing. The value of the pension fund’s property investments has plunged from $17.6bn to $13.5bn since April. The portfolio has been underperforming its benchmark for at least a decade and in the year to September delivered returns of -48.7%.
“This has been primarily driven by 2006-2007 invest-ments’ poor performance in the real estate portfolio,” PCA said. BlackRock is rumoured to be among those dropped. In 2006, CalPERS invested $500m in a $5.4bn deal with BlackRock and Tishman Speyer Properties to buy Peter Cooper Village and Stuyvesant Town, a 11,000- apartment complex in New York.
That purchase has gone sour as property values tumbled and tenants fought off rent rises. In November the debt was moved into special servicing. CalPERS has already parted company with one of its “non-core partners”, MacFarlane Partnerships, which steered it into a disastrous $970m investment in LandSource, a land acquisition specialist that ﬁled for bankruptcy last year.
PCA said that given the weak economy, it expects the value of CalPERS’ real estate portfolio to deteriorate even further. Real estate currently makes up 6.9% of the pension fund’s total investment – well under the 10% target allocation.
“The underweight real estate position and distressed market conditions indicate that 2010 may be an excellent time to begin looking at new acquisi-tions that are consistent with CalPERS’ new investment policy,” said PCA.
- US bank Citigroup has shortlisted Leon Black’s US Apollo Group, ING REIM and Macquarie as potential buyers for Citi Property Investors, which is headed by Roger Orf. Orf, who is not involved in the sale process, used to work at Apollo.