UNITED STATES - California State Teachers Retirement System is making a significant move to almost triple its exposure to international real estate over the next four years to tap the investment potential of office space.
The pension fund believes there will be solid investment opportunities outside of the US, particularly in Europe and office developments, as the Board believes major European markets are on the upswing for the first time in several years.
As a result, the pension fund board’s 2008 fiscal year business plan is proposing to increase its real estate allocation first to 15% then 20%, to eventually reach 30%.
More specifically, the Board believes there are opportunities to be had in London, for example, where vacancies in office space have been pushed down to 8% from 15% two years ago but are unlikely to stay at this level for long as new construction is likely to lead to higher vacancies later in the decade.
CalSTRS suggests the Asian markets is looking attractive as there will be set to be new office buildings available for purchase soon, including over two million s.f. (0.18580608 meters) of office buildings per market under construction in Tokyo, Shanghai and Beijing.
All of these projects are expected to be completed in 2008 or 2009 and there might yet be some government restrictions placed on how much could be sold to foreign capital so the pension fund believes that the best way to work with this is to use a strong local partner to mitigate potential problems and gain access to deals otherwise unavailable.
CalSTRS will be looking for investment opportunities in both Europe and Asia but its main focus will be investing in the main property types of office, industrial, retail and residential.
Importantly, the pension fund believes most of its investing will be done through opportunistic manager commingled funds or through joint ventures with some of its existing real estate managers which already have an investment platform overseas.
That said, CalSTRS still has a way to go before it reaches its current 11% of targeted allocation for real estate as it has now invested just 9.2% of its total assets in the asset class.
The pension fund thinks it will get to its targeted allocation sometime over the next 24 months as CalSTRS now has a real estate portfolio valued at $15.8bn (€11.5bn) and is seeking to achieve a real estate portfolio reaching $28bn by 2011-2012.
CalSTRS also looked at approving its first ever allocation for public real estate at its July board meeting of up to 30% in US and overseas publicly-traded REITs and real estate operating companies.