12 July 2017
Reporter: Mark Dugdale

Pension fund considers ways to overcome real estate challenges

The California State Teachers Retirement System (CalSTRS) faces a challenge in trying to meet its overall real estate investment return objective of 8 percent by 2020, the pension fund’s real estate team has said.

The investment committee of the $209 billion pension fund is meeting today to discuss its investment plan for the next financial year. The real estate team, led by director Mike DiRé, has indicated that “it will be a challenge to attain an 8 percent overall return especially if the US economy slows down”, according to a document published ahead of the meeting.

“Beating our benchmark will also be a challenge as we are overweighting lower risk strategies,” it said.

The CalSTRS real estate team does expect the pension fund’s portfolio, which contains assets worth $25 billion, to continue to produce “moderate income returns” of 3 to 5 percent. Capital appreciation, which has been between 5 and 8 percent, is projected to slow to between 1 and 3 percent due to increasing supply and potentially rising interest rates.

To counter these challenges, the CalSTRS real estate team is “studying the pros and cons of increasing or expanding” positions where it owns real estate operating companies. “It will require more staff time to do so. Using similar structures overseas will be challenging if and when we decide to expand international allocations.”

The real estate team “has reasonable coverage of the US in the four major asset types” and it remains “an ongoing challenge to expand these investment structures to debt investments and specialty product types like senior housing”.

It will also research best-in-class environmental, social and governance programmes “to seek out Improvements”, as well as implement new responsible contractor bidding.

The investment committee met last month and discussed the recruitment of a new real estate investment consultant. Interviews for the position will be held in November.

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