San Diego City shifts allocation to increase real estate debt exposure

San Diego City Employees’ Retirement System (SDCERS) has restructured its asset allocation to allow it to increase its real estate debt exposure.

The $6.8bn (€6.1bn) pension fund is moving existing real estate equity fund investments out of an opportunistic multi-asset portfolio to make room for more real estate debt funds, according to a board meeting document.

The move has enabled it to commit $40m to Brookfield Real Estate Finance Fund V, a vehicle investing in US mezzanine debt. SDCERS is expected to make further debt fund investments in 2017 and 2018.

SDCERS has an 8% “opportunity fund” allocation, which can include investments from multiple asset classes.

More than one-third of this is invested in real estate funds Carlyle Fund VII and LaSalle Asia Fund IV, meaning the opportunity fund it is fully allocated to real estate.

To free up more space for real estate debt, SDCERS has moved the two real estate funds to its real estate allocation.

The pension fund, advised by Aon Hewitt, is keen to invest in real estate debt as it believes the asset class provides one of the most compelling strategies available in the market.

The board meeting document said the consultant “believes that the constraints of an asset allocation should not preclude SDCERS from accessing interesting and attractive opportunities”.

SDCERS already has investments in three real estate debt funds managed Torchlight Investors andMesa West Capital, which now reside in its opportunity fund. 

The pension fund said there is a market opportunity for more than $1trn in commercial real estate debt expected to mature between 2016 and 2019. Much of this debt will require additional capital beyond what traditional lenders currently offer to complete each refinancing.

Brookfield is seeking to raise $2bn for its fund, and plans to co-invest $400m. It has already attracted a $100m commitment The New York State Teachers Retirement System.

The fund will originate whole loans before selling the first mortgages and retaining the mezzanine exposure.

It will target 60-80% loan-to-value ratios to generate high current returns.

SDCERS also made two new investments for its real estate allocation, committing $20m to CBRE Strategic Partners US Value 8 Fund and Landmark Real Estate Partners VIII.