UNITED STATES - California State Teachers Retirement System and Waterton Associates have created a new apartment investment fund, to tap into what they anticipate will be a shift in the sector.

The Waterton Residential Properties Fund X has total equity of $111m (€75.5m), with CalSTRS is putting up 90% or $100m for equal equity and while Waterton contributed 10% or $11m.

David Schwartz, managing member at Waterton, said both parties can see strong investment potential in the changing residential arena but noted finding good investments will take skill over the next few months.

"The apartment market is going through some changes that will create some new investment opportunities. This will include some of the condo conversion projects that didn't work out. One of the markets that we are in where this really happened is in South Florida," said Schwartz.

"Our pipeline for new deals is bone dry right now. Sellers are having a hard time figuring out where to price the assets given that cap rates are now starting to move north a little bit. The market correction on pricing could be from 5% to 10%.  And this situation will make in hard to find properties to buy in the short term," he added.

The total capitalization of Properties Fund X is around $317m, based on leverage in the neighborhood of 65-70%.

There are no assets in the fund now but Waterton and CalSTRS have around $40m of equity left to invest from its previous fund, Waterton Residential Properties Fund IX, which is expected to be enough capital for two tor three more deals.

CalSTRS made the equity investment in Fund X after receiving a report and analysis from its independent real estate fiduciary Pension Consulting Alliance.

Strategy for the investment fund is to focus on the acquisition, renovation and repositioning of apartments through the United States, but is likely to look more specifically at regions such as Washington DC, Chicago, Southern California, Dallas, Austin, Atlanta, Denver and South Florida.

Officials behind the fund are seeking transactions which can deliver leveraged IRR of 12% to 14% over a five-year holding period.

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