UNITED STATES- California State Teachers Retirement System (CalSTRS) has taken an $82.9m (€61.2m) hit in its real estate portfolio as one of its investments, Fairfield Residential LLC, has filed for Chapter 11 bankruptcy protection.

Fairfield Residential is a real estate manager investing in apartments but has suffered like many other investors in the US apartments who are predicting a slow and long-term recovery.

CalSTRS had made its first $70m investment with Fairfield in May 2005, through the Fairfield Residential Operating Company, but the total investment was eventually $82.9m.

The pension fund valued the investment at zero in the first quarter of 2009, and has remained this way since, so the move has been a tough object lesson for CalSTRS: this was the first time it had made an investment in a real estate operating company.

In the first year, CalaSTRS invested $25m in equity to gain a 19.9% stake in the company, as part of its opportunistic holding. Its ownership stake was later expected to be increased to around 37.5% and the pension fund had approved the investment based on a recommendation from its real estate independent fiduciary manager, Pension Consulting Alliance.

This is not its only investment with Fairfield, as CalSTRS and Fairfield do have an apartment investment relationship together known as Fairfield Residential, albeit this is not affected by the Chapter 11 filing behind the company.

Its total equity committed to the relationship was $850m, but CalSTRS placed a value on this investment at $237.2m in Q1 2009.

The US residential sector is not expected to improve much in 2010 so many investors are not expecting rents to improve much, according to David Gleeson, executive vice president  at L&B Realty Advisors.

"We think that rents will be flat for 2010. This is what we are planning for the apartments that we own," he said.

The bigger issue, says Gleeson, is the capital being used to buy residential properties is leading to low cap rates in the top markets, which is why some landlords are now selling in markets such as Washington DC and downtown San Francisco.

"Some buyers are looking to buy apartments at 5-6% cap rates.  These low returns are being fuelled not by the property's fundamentals, but more by all the capital chasing deals," said Gleeson.

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