UNITED STATES - San Francisco City and County Employees' Retirement System made changes to its real estate portfolio to take advantage of market dislocation.

The fund has made a commitment of up to $25m (€15.9m) into the Fidelity Real Estate opportunistic income fund as San Francisco City and County thinks that by investing in a debt fund it can participate in the current real estate credit market dislocation.

At the same time, the pension fund has also agreed to transfer its 80% interest in AMB Partners II to AMB Institutional Alliance Fund III - a move which would have given the fund a 27% holding in Fund III, if the transfer had occurred at the end of 2007 - for diversification and portfolio realignment reasons.

San Francisco has past experience of working with the high yield real estate team at Fidelity as it is one of two managers managing high-yield commercial mortgage-backed securities (CMBS). At the end of 2007, Fidelity managed $220m in the CMBS arena for San Francisco.

Fidelity has structured its new real estate opportunistic income fund, which last year had total assets of $220m including a $25m co-investment from Fidelity, as an open-ended commingled fund.

The investment house drew down capital slowly last year as the credit conditions in the marketplace worsened but will add the capital from San Francisco this month, likely in one tranche while a further $50m could be called into the fund in June to produce a $1bn commingled fund within three to five years.

Fidelity will invest in an array of high yield real estate debt securities and instruments backed directly and indirectly by commercial property while some of the capital will be invested in residential mortgage-backed securities and subordinated securities of real estate CDOs.

In contrast, the pension fund previously held an 80% ownership stake in AMB Partners II, a deal which contained 32 US-based industrial properties with a value of $433m to the end of December 2007.

AMB Institutional Alliance Fund III, for the same time period, owned 169 industrial buildings around the country but the book value of these assets is $1.9bn.

The pension fund moved the assets in AMB Partners II into the core sector of its real estate portfolio last September, increasing its funded and committed investments in core real estate to 62% of its portfolio.

Transfer of the assets to AMB Institutional Alliance Fund III should rebalance the allocation to value-added and allow San Francisco City and County to move closer to its 20% target allocation for core.

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