CoStar Lead Street (Dec. 16-22): CalPERS To Boost Real Estate Allocations

In this week's issue of CoStar Lead Street, while it seemingly goes contrary to flat and declining U.S. property values, CalPERS plans to boost its real estate allocation and will go overseas to do it. Meantime, one U.S. land company is getting overseas money to spend in California. And Australia-based ING Office Funds is getting record rents for its properties on the East Coast. Plus, we tell you where corporations have decided to grow, including Kimberly-Clark's locking in 1.6 million square feet in the Atlanta area, and tell you of the latest major properties to come under contract for purchase.

CalPERS Targets $5 Billion More for Real Estate

CalPERS (California Public Employees' Retirement System) adopted a new investment asset allocation this week for its investment portfolio. As part of that plan, it is upping its real estate asset allocation from 8% to 10% -- a potential boost of $5 billion.

CalPERS investment officers will use the new targets to deploy capital during the next two to three years, when the board tentatively is scheduled to again review and revise the allocation mix, based on dynamic market trends.

"We have achieved strong results for the last four years, but that is not a guarantee that we would be as successful with the existing allocation," said Rob Feckner, CalPERS board president. "This new asset allocation - with its emphasis on international stocks, venture capital, commodities, real estate and infrastructure - is the right mix to help us provide for our retirees and minimize the need for taxpayer dollars."

Ironically, CalPERS is upping its allocation at a time when commercial property values could be edging down. CalPERS hopes to offset that trend by expanding its reach. CalPERS currently has invested allocation in real estate is 7.8% on a cash basis.

The fund's real estate staff has proposed a new strategic plan with an emphasis on further diversification through a value-add centric approach in terms of strategies and an increased international allocation. CalPERS said that this approach would allow for additional deployment of assets.

CalPERS said capitalization rates have reached low levels due to higher valuations of real estate assets over the recent period. A slowdown in the U.S. economy may pose risks to current valuations, but could present new opportunities in the future.

It said it is confident that new international opportunities combined with potential U.S. opportunities will enable new targets to be reached within a two-year period.

Overall, CalPERS will continue to target two thirds (66%) of its portfolio to public and private equities combined. Fixed income and inflation-linked assets combined will be 24%.

Global publicly traded stocks, which were 60% of the total portfolio, will move downward to 56% and will be evenly split between U.S. stocks and international stocks.

Private equity, which was 6%, will gain assets as it moves to 10%, offsetting the decrease in publicly traded equities. Similarly, Fixed Income's target will decrease from 26% to 19%; the new inflation linked assets will have a 5% allocation.

There is no timeline for deploying funds under the new allocations since investments will depend partly on market trends and opportunities. Most new targets will be reached within two to three years.

"These revised allocation markers reflect the promise of our private equity, real estate, and asset-linked investment classes," said Charles P. Valdes, Investment Committee chair. "By hitting the reset button every few years, we keep our portfolio balanced and diversified in a fluid market that never stands still."

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source: costar.com