CalSTRS targets 7-9% real estate returns as capital appreciation slows

California State Teachers’ Retirement System (CalSTRS) believes it can maintain its return objectives for real estate over the coming 12 months, despite expecting capital appreciation in the asset class to slow or even stop.

For the fiscal year ending 30 June 2019, the pension fund has an absolute return objective of 7.7% and relative return objective to outperform the core US benchmark NFI-ODCE by 70bps.

According to a board meeting report, CalSTRS expects capital appreciation of real estate assets to slow to between 0% and 3% (last year it forecast 1-3%), while its expectations for income returns remain stable at 3-5%, “depending on product type and location”.

This will lead to core real estate returns of 5-7%, it said.

“The strong returns from our higher-risk strategies should bring our overall returns to 7% to 9%,” the pension fund said.

Core assets account for 67% of the $28bn real estate portfolio, while value-add and opportunistic represent 19% and 14%, respectively.

CalSTRS also plans to evaluate its existing 50 “collaborative relationships”, which include fund investments, separate accounts, joint ventures and investments in operating companies.

It said it also plans to “develop a list of ’like-minded’ investors to potentially purse large transactions”.

CalSTRS was ranked 11th in IPE Real Assets’ Top 100 Real Estate Investors 2018.

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