San Diego City makes defensive real estate debt commitments

San Diego City Employees’ Retirement System is investing in two debt funds to diversify and reduce the risk in its real estate portfolio.

The pension fund is committing $100m (€87.7m), split equally between the MetLife Commercial Mortgage Income Fund and the Mesa West Core Lending Fund, according to a board meeting document.

In-house investment staff and the pension fund’s investment consultant Aon Hewitt have recommended introducing debt exposure to the real estate portfolio because property markets are thought to be at a mature point in the cycle.

The Met Life Fund is an open-ended vehicle with 20 investors and a current gross asset value of $993m, including $529m in commitments from MetLife-affiliated investors and dividend reinvestments.

The fund is targetting 6% to 7% average annualised distributions.

Most of the fund’s investments will be commercial mortgage loans in a first lien position in the range of $10m to $150m.

The targeted property types are office, retail, apartments, hotels, industrial and mixed-use, and around 60% of the fund will be invested in primary markets.

Mesa West Core fouses on coastal markets and primary markets with high barriers to entry. It will seek assets that can produce a 6% to 8% annual net return comprised primarily of current income.

San Diego City is also looking to commit $47m to RREEF America REIT II, a core open-ended fund with a gross market value of $11.6bn.

The fund targets a net annual total return of 6% to 8%.

Deutsche Bank, which did not comment, is seeking to raise an additional $1.1bn for RREEF America II this year, including capital reinvestments.

The fund buys office, industrial, retail and apartment assets, and around 69% of the portfolio is located in gateway markets including San Francisco, New York, Boston and Los Angeles.

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