CalSTRS creates $500m REIT allocation and trims real estate portfolio by $2bn

California State Teachers’ Retirement System (CalSTRS) has been transforming its real estate portfolio ahead of a vote today on whether to increase its target allocation to the asset class.

The $242bn (€215bn) pension fund in the US has been over-allocated to real estate for some time and has made $2.1bn of disposals in the asset class so far this year, according to a board meeting document.

It also plans to allocate $500m to real estate investment trusts (REITs) and has hired its second REIT manager, CenterSquare Investment Management.

The changes come ahead of today’s investment committee meeting where it will consider proposals to increase the real estate target allocation from 13% to 15%.

At the end of September this year, the pension fund’s $33.8bn property portfolio represented 14% of total assets, down from 14.2% at the same point last year.

CalSTRS already increased its real estate allocation target from 12% to 13% earlier this year, and it is permitted to exceed its target by up to three percentage points.

Real estate consultant RCLCO Fund Advisors was asked to explore the feasibility of increasing the target and whether it “would result in diminished returns”.

RCLCO concluded that CalSTRS “should be able to increase the allocation… in an accretive manner” while maintaining “discipline with investment criteria”.

CalSTRS has established a new $500m allocation to REITs and RCLCO said this “could be deployed immediately” to achieve to 15% real estate target.

Earlier this year, CalSTRS hired Principal Real Estate Investors as its first REIT manager.

The pension fund has also been active an active real estate seller, disposing of $1bn in direct assets owned through separate accounts and joint ventures this year, while also issuing $1.1bn of redemptions from open-ended property funds.

RCLCO said that, “while CalSTRS has been a net seller of open-ended commingled funds, CalSTRS could transition toward investing in such funds, most of which do not have an entry queue at this point in the cycle, and thus would allow for capital… to be deployed quickly”.

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