UNITED STATES - Los Angeles County Employees Retirement Association has approved $250m (€158.9m) worth of new real estate commitments, to invest in listed real estate and hotels.
European Investors has been hired by the pension fund to run a $100m international REIT manager account while the remaining $150m has been allocated to the Cornerstone Hotel Income Equity Fund II (CHIEF II).
John McClelland, principal investment officer for real estate for the pension fund, said the fund made these decisions on March 12, assisted by real estate consultant, The Townsend Group, as LACERA believes in an international REIT strategy.
"The pension fund expects to get broad diversification to international real estate through publicly-traded securities," said McClelland, in contrast to the past when LACERA only invested in international real estate though commingled funds.
European Investors was selected to handle the discretionary account based on its strong track record, as McClelland added: "They have a seven-year track record with investing in international REITs. The other managers we considered were much shorter than that."
Other finalists considered as possible managers to the account were RREEF and CB Richard Ellis Investors.
LACERA has enjoyed decent gains in the past through investing in hotels, according to McClelland, but is taking a slightly different route this time to achieve diversified returns.
"The pension fund has enjoyed success investing in hotels and believes that supply and demand fundamentals bode well for continued attractive investment opportunities," said McClelland.
"The commingled fund vehicle will allow LACERA to obtain broader geographic and manager diversification than it could achieve in a separate account for the same kind of investment. The pension fund plans to consider additional hotel commingled fund opportunities in the future," he added.
LACERA is aware of how much hotels are tied to the economy but McClelland stresses "the ‘upper-upscale' sector of the hotel market is expected to weather the downturn better," further adding: "These are the kind of hotels that Cornerstone will be buying. Another factor is that the funds will be invested over a 30-month period and pricing on hotels is improving."
Cornerstone CHIEF II fund is projected to raise $400m-$500m while total capitalization will be around $1.3bn.
The Cornerstone will be buying existing ‘upper-upscale' value-added properties in the major US markets such as California, and along the Boston to Washington corridor on the East Coast, to deliver a projected net IRR for investors in the range of 15-18%.