UNITED STATES - California State Teachers Retirement System is thinking of approving a new long-term allocation to real estate.

The new allocation could eventually increase real estate holdings from 12% to 15% if officials agree to the move.

Pension fund officials said moving the target better positions the portfolio for future growth and advances the asset classes' primary goal of diversifying the CalSTRS investment portfolio.

That said, officials also recognise the current market situation for real estate is a challenging one, albeit the pension fund is open to investing in all sectors and will go where the opportunities arise.

Should the new strategy go ahead, the first step will be to increase the real estate allocation to 13% effective from 1 January 2010, providing of course if investment opportunities present themselves.

Further adjustments to the allocation would then be considered in June and December of each year If the investment opportunities are available, the steps may be jumped or shifted in six month intervals, although the plan calls for the pension fund to potentially reach the 15% targeted allocation by step three of the process.

CalSTRS officials also said the real estate investment strategy over the next 12 months is to essentially go back to basics. This means it could actively manage existing relationships to maximise occupancy and revenue from its current holdings, while at the same time lower portfolio leverage to better take advantage of market opportunities.

CalSTRS is also planning to squeeze better terms from existing managers, in a bid to control costs, as well as seek out quality assets from distressed sellers.

The pensions body currently a minimum real net-of-fees IRR of 5% for core real estate and 9% for a minimum real net-of-fees IRR for tactical investments.

Any potential changes in the asset allocation would be made as part of an overall asset allocation study conducted this year with the assistance of Pension Consulting Alliance.

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