GLOBAL - The San Diego City Employees' Retirement System is set to increase its non-core exposure to real estate by $60m (€44.6m) over the next few years.

Real estate consultant Townsend Group recommended the move at the pension scheme's 20 January board meeting, during which it approved its real estate investment plan for 2011.

Townsend said the strategy would improve San Diego's diversification profile and increase the percentage of the portfolio directed to alpha-generating investments.

It also said real estate markets in the US were showing signs of stabilisation and that there would be opportunities in secure-yield and cyclical recovery plans.

The real estate consultant said secure-yield investments would provide the pension fund with a source alpha with low levels of risk.

Secure-yield investments may be available in niche property types like senior housing and in debt-related investments with low loan-to-value ratios and conservative underwriting.

San Diego is also thinking to maintain its existing allocation to public REITs.

Townsend said the portfolio would benefit from holding its current allocation to public investments given the more mature funding status of the total real estate portfolio, the volatile nature of public securities and the additional liquidity features inherent in the new investments proposed for the private core portfolio.

The strategy calls for reducing the exposure to REITs in the future as additional private investments are funded in 2011 and 2012.

At the end of 2010, public REITs comprised 27% of the pension fund's total real estate portfolio. 

This puts it within its tactical range of 0% to 30% for public investments that was established in 2010. The idea is to move REITs to 22% in 2011 and 20% in 2012.

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