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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