The Arizona State Retirement System is to invest $1.2bn (€1.1bn) in real estate this year after upping its allocation to the sector, according to a recent document.

The US pension fund allocated $550m-750m to new managers, $100m-200m to close-end funds and $100m-300m to existing separate account managers.

The pension fund had considered increasing its allocation from 8% to 10% at the end of last year.

Arizona State has been investing in specific non-core strategies in recent years, as well as in funds investing in multiple asset types.

Typical investments include a $400m apartment development programme with Forest City Enterprises and an allocation to Blackstone Property Partners’ core-plus fund.

Related Companies, Red Mill Capital and The CIM Group also manage real estate investments for the pension fund. 

Arizona State’s investment consultant, NEPC, said it continued to be positive on non-core, value-add and opportunistic strategies and neutral on core US real estate.

NEPC said the amount of capital in US core real estate was driving up pricing, with higher future interest rates and their impact on cap rates and capital values expected.

The consultant said a non-core investment strategy could see capital invested in Europe as it slowly emerges from recession.

NEPC also pointed out that banks in the European Union were still over-leveraged and had significant real estate exposure.

Banks in Europe have at least 90% of real estate debt, or €2.3bn, the consultant said, compared with US banks’ 49% holding of real estate debt.