Big institutional investors are adding some new twists to their customarily staid approach to investing in real estate.
Besides investing directly in properties and accumulating portfolios of mortgages, some pension funds and other large institutional investors are creating separate pools of investment dollars to invest in real estate in ways they haven't tried before.
One of the most recent examples is a new $500-million fund established recently by CalPERS, the California Public Employees Retirement System, the country's largest public pension fund with assets totaling approximately $177 billion.
The new $500-million fund, which CalPERS calls the Joint Real Estate and Alternative Investment Management Technology Program, will invest in real estate both directly and indirectly.
"It's really two investment strategies," explained Richard A. Magnuson, executive managing director of CB Richard Ellis Investors in Los Angeles, which CalPERS has named as its advisor on the fund.
One strategy, Magnuson said, is to invest in businesses that are developing technology for the real estate industry, such as providers of high-speed Internet access to office buildings or firms that offer online property listings or other Web-based real estate services.
The other strategy is to invest in real estate that has been built especially for technology-intensive uses, such as data storage centers, Web hosting sites and other buildings that are part of "the e-business structure," Magnuson said.
CalPERS' new $500-million fund represents a little over 5% of the $9.3 billion the pension fund has invested in real estate, which in turn is a little more than 5% of the fund's total portfolio of investments. That $9.3 billion, in turn, is approximately 5.4% of the entire $177-billion CalPERS fund, which has a stated policy of investing 5% to 10% of its money in real estate.
It's common for large institutional investors to set a goal of putting 5% to 10% of their investment dollars into real estate.
To meet or maintain goals and to take advantage of what many believe is an opportune time to buy real estate for the long-term, many of these funds in recent years have become more active or more imaginative in their approach to real estate.
The Los Angeles County Employees Retirement Assn. (LACERA), for example, has become a much more active buyer of real estate in the past few years to achieve its goal of real estate as 10% of its holdings. LACERA's real estate holdings stood at about 5.5% of its total portfolio in 1995, according to John McClelland, the fund's principal investment officer for real estate. The fund bought an average of $500 million worth of new property each year for the past several years and recently achieved its goal, McClelland said.
LACERA now has approximately $3.1 billion invested in real estate, or 10% of the approximately $31-billion LACERA fund, according to McClelland, who said the fund "predominantly is looking for investment opportunities in existing, fully leased buildings" that are considered low-risk investments.
"We typically buy title to the property," McClelland said, as opposed to investing in real estate in other forms--such as mortgage-backed bonds or the stocks of publicly held real estate investment trusts. Its holdings include office properties ($975 million), industrial buildings ($693 million), apartments ($557 million), retail space ($534 million), hotels ($258 million) and a single-family home building program in which it has invested $99 million.
"We haven't had a particularly difficult time achieving our goal" of 10%, McClelland said, noting that LACERA and other institutional investors have faced less competition since the late 1990s slowdown in buying by REITs.
Spreading out the risk is a common theme among big investors.
"Our goal is to achieve geographic diversification," said Tom Garbut, a fund manager at New York-based TIAA-CREF, "so that if we do see temporary regional recessions in certain areas of the country, we will have other areas that are holding up well."
TIAA-CREF looks for "high employment and population growth markets" to help the fund perform well over time, Garbut said. "The West Coast is exhibiting some very strong fundamentals now, especially Southern California."
Diversification of property types is another common theme.
TIAA-CREF invests both through outright ownership of properties and in the form of mortgage financing, said Garbut. It invests in a broad spectrum of categories--office buildings in suburban markets as well as central business districts, industrial properties, apartments and shopping centers. "Different asset types react differently to different economic conditions," he said, "so diversification gives us a stronger, more stable portfolio."
The categories Garbut cited are what the institutional investors call "core investments"--tried-and-true property types that can be expected to deliver results over the long term.
CalPERS' $9.3 billion in real estate holdings, for example, includes $6.7 billion in such core investments, plus $2.6 billion in a "specialized portfolio" that includes a dozen categories ranging from the $1.4 million it has invested in online real estate service provider PropertyFirst.com to $1.3 billion worth of timberland.
Like CalPERS, TIAA-CREF is looking at categories beyond core investments, such as high tech-related real estate, senior housing and public storage facilities.
High-tech real estate "is an area we have to look more closely at to see what the profit potentials might be," Garbut said, adding that these potential new categories of investment "are never mainstays of our program, but we're always looking to see if their risk-reward profile is desirable for our portfolio."