UNITED STATES - Pension funds are still eyeing hotel properties as a good investment, as San Diego is the latest to shift additional assets into the sector and Principal has made its first purchase for investors.

San Diego City Employees Retirement System has just made a $20m (€13.8m) follow-on commitment to the Cornerstone Hotel Income and Equity Fund II commingled fund, at the same time as Principal Real Estate Investors has made its first ever equity investment in a hotel project.

It is thought there are still strong market fundamentals to be in the lodgings industry and demand for space is growing because there is little new development occurring, boosting the Revenue per Available Room (RevPAR) in all hospitality sectors.

To reinforce this view, PricewaterhouseCoopers is now projecting RevPAR growth of 5.6% in 2007, 5.3% in 2008 and 5.2% in 2009.

San Diego City placed money with Cornerstone's fund at the same time as agreeing to invest in the Chief II hotel offering, according to Dawn Clarke, assistant chief investment officer for San Diego.

"We think it makes sense to add some more hotel exposure to our real estate portfolio," she said.

CHIEF II is a blind investment fund designed to acquire upper upscale or full-service business-class and boutique hotels, and is seeking a total equity raise of $400m, to give total capitalization $1.3bn with its 70% leverage.

One other pension fund investor to this fund so far is the Teacher Retirement System of the State of Illinois, with its $50m contribution.

However, this comes at the same time as Principal and Miller Global Properties have formed a JV to build the JW Marriott San Antonio Hill Country Resort and Spa in San Antonio, Texas - a development which will have 1,000 hotel rooms to attract the conference circuit, along with two 18-hole championship golf courses.

Principal has a 33% stake in this investment as part of its $7.6bn US Property Account open-ended core commingled fund - an investment strategy allows for a small portion of the commingled fund to be invested in development projects.