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Pension Funds Travel

A growing number of U.S. pension funds are tapping real estate opportunities abroad. According to the Pension Real Estate Association 2007 survey, 45 of the largest 1,000 U.S. pension plans will send capital abroad in 2007.

PREA research director Jim Clayton cites two reasons: portfolio diversification and returns up to 200 basis points higher than domestic returns. “The better demographics for international markets are also a factor,” says Clayton. “Larger populations that will increasingly become urbanized, plus the resulting wealth as these economies develop, bode well for the demand for real estate.”

Seven pension plans have already invested more than $685 million of commingled funds into foreign markets during the first quarter this year. Most are new to offshore real estate investing. The School Employees Retirement System of Ohio, for one, last year allocated 15% of its real estate portfolio toward international investments.

Rob Kochis of Cleveland-based consultant Townsend Group sees this niche strategy growing over the next several years. Townsend clients include the San Diego City Employees Retirement System and New Jersey Division of Investment, which have allocated $2 billion to $3 billion to U.S. and foreign real estate investment. “International real estate allows an investor to place capital in other countries that are going through different economic cycles,” says Kochis. His top growth prospects are the Asia-Pacific region including Japan, Europe and Latin America.

All of these markets were targeted by pension funds during the first quarter. In Latin and South America, which have a dearth of institutional-quality assets, pension funds have largely invested in new developments. Clayton says that 58% of the funds' international real estate holdings were located in Western Europe. Another 21% were in the East Asia/Pacific Rim region. The balance, or 18%, wasn't allocated by specific region.

The nation's largest pension fund is clearly committed to offshore opportunities. The California Public Employees Retirement System (CalPERS) will allocate up to 50% of its $18.3 billion real estate portfolio to international assets.

CalPERS is one of the few pension funds to create a direct investment program internationally through a separate account manager. For instance, the pension fund recently expanded its Mexican and Brazilian operations by investing $285 million in partnerships with Houston-based developer Hines.

“We think that there's a growing middle class in both markets that will need new properties,” says CalPERS portfolio manager Robert Eberhardt, who sees rising housing and retail demand.

The Los Angeles County Employees Retirement Association (LACERA) has also earmarked funds for global real estate. At the end of last year, the $37.6 billion fund allocated $380 million, or 10% of its real estate portfolio, to be invested over the next several years through commingled funds and real estate securities.

In February, LACERA committed $40.7 million to CB Richard Ellis Investors Strategic Partners UK Fund III and Europe Fund III. “There are some good investment opportunities in Europe,” says John McClelland, LACERA's principal real estate investment officer. “This will allow us to achieve diversification within our real estate portfolio.”

Name International allocation* Value of total real estate portfolio
California Public Employees' Retirement System Up to 50% $19.4 billion
San Bernardino County Employees Retirement Association 6%-10% $650 million
School Employees Retirement System of Ohio 15% $1.13 billion
Teachers Retirement System of the State of Illinois 10% $4.06 billion
* targeted goal Sources: Individual pension funds
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