REAL ESTATE - Massachusetts Pension Reserves Investment Management Board(Mass PRIM) has approved a new value-added investment policy for its real estate portfolio. The pension fund took this action at its board meeting earlier this month. It was assisted in the decision by its real estate consultant, The Townsend Group.

The pension fund has created this new policy because of concerns it has with the real estate investment universe. It is concerned about all of the capital chasing core assets and keeping returns very low. But also it is worried about the declining property valuations and future return prospects in the REIT sector.

The amount that has been allocated for value-added investments in 2007 is $300m(€228m), which will be invested through one separate account real estate manager, RREEF. On a portfolio basis, Mass PRIM has established that value-added investments shall be limited to a maximum of 25% of the total real estate portfolio.

The pension fund will be looking at a variety of deals and property types as part of its value-added strategy. It some cases it will be placing equity in new development projects.

Others will be buying existing property types that can be fixed up through a variety of strategies. These could include a renovation, releasing, reposition or redevelopment.

Some of the transactions for value-added will be done with the typical property types of office, industrial, retail and apartments. Alternative property types will also be considered. Some examples of these are senior and student housing, medical office buildings, self-storage and hotels.

Returns for value-added investments should exceed those of core returns by at least 150 basis points. This is calculated on an underleveraged basis.

Managers will underwrite investments to show both unleveraged and leveraged returns. The amount of leverage allowed for any single investment is 65%.

Mass PRIM will use a variety of investment structures for its value-added strategy. These will include 100% equity, partnership and joint venture. The pension fund or investment manager must have control and-or approval rights over all of the investment decisions.