The California Public Employees Retirement System, the largest U.S. public pension fund, may sell part of its $2 billion in residential land holdings after the investments lost 31% last year amid falling home prices and forecasts of further declines.
Sacramento-based CalPERS hired investment bank Morgan Stanley to review seven land deals that it made with joint-venture partners and real estate advisors, fund spokeswoman Pat Macht said. The fund may sell some of the land, purchased to develop new homes, or renegotiate the partnerships.
"CalPERS is doing a case-by-case review, and of course there could be some restructuring," Macht said in an interview. "There could be some selling. We could hold some. As each partnership is reviewed, there could be a variety of dispositions."
Vacant land intended for housing is losing value as new-home sales drop to their lowest rate in 17 years. The 10 largest home builders reduced their land holdings by 39% at the end of 2007, Paul Puryear at Raymond James & Associates said April 9. Demand for new homes may not revive for two or three years amid a supply glut, according to a report last month by RREEF Research, a unit of Deutsche Bank.
U.S. home prices will fall an additional 10% through the end of next year, with even steeper declines expected in "bubble areas" in parts of California, Nevada and Arizona, Michelle Meyer, an economist for Lehman Bros. Holdings Inc. in New York, said.
"Our goal is to manage our way through the downturn, maximize our investments and minimize our risks," Macht said. "We are in a good position because we don't have a liquidity problem."
One of the CalPERS ventures under review is LandSource Communities Development, a 15,000-acre tract north of Los Angeles known as Newhall Ranch, which filed for Chapter 11 bankruptcy protection Sunday after failing to restructure its debts with lenders. CalPERS paid $970 million in cash and property to home builder Lennar Corp. through advisor MacFarlane Partners for 62% of the development in January 2007.