The Pension Real Estate Association (PREA) is the world’s largest association for pension and endowment investors in real estate, with 1,300 members from 420 companies across the world, mainly from the US. Its mission statement is “to serve its members engaged in institutional real estate investment through the sponsorship
of objective forums for education, research initiatives, membership interaction and the exchange of information”.
The association was founded in 1979 and has run 15 Annual Plan Sponsor events, the latest in Beverley Hills last autumn, featured a panel of pension fund and endowment chief investment officers talking about their plans for real estate. The investors range from giant pension fund Calpers to recently-founded educational foundation Lumina. The panel was moderated by Kevin Lynch, co-founder of real estate consulting firm the Townsend Group.

Kevin Lynch (moderator): Each CIO must act as
an orchestra conductor to bring all the various elements
together to bring financial harmony. The
instruments range from U.S. and foreign stocks and
bonds, hedge funds, venture capital and of course real
estate. Each CIO here faces a variety of challenges.
Each plan has very different and unique goals and
objectives. Each has made a decision on whether or
not their respective allocation policies will meet their
plan’s objectives. Firstly, can you run through your
assets and your real estate allocations?
David Russ, University of California, Board of
Regions: We actually have $60bn (€45.3bn) in
assets and we have a pension plan, an endowment, we
manage $8bn for funds for our employees and we
have a little cash portfolio about $7.5bn. In the
endowment we’ve been diversifying away from the
asset allocation of the pension plan. When I started in
this position in June 2001 they were very similar. It
was a classic 65/35 stock/bonds portfolio. In the pension
plan, about a year ago we received approval for
5% in real estate, as well as in the endowment. We
have a cost living adjustment formula that is directly
tied to CPI so it is a natural hedge for inflation of our
portfolio. We are also reducing our exposure to
domestic US equities and that is a source for our real
estate as well as bonds.
Mike Ross, Stamford Management Company:
Stamford’s endowment pool is a $10bn dollar pool.
There is another $2bn of are other financial assets that
are not fundable: university lands, etc. The endowment
pool is highly diversified, has about 20% longterm
target to domestic equities, 10% to international
developing markets, 5% to emerging markets, we
have a 16% long-term target to real estate, 15% to
hedge funds, 10% to private equity and 7% to what
we call natural resources – oil, gas, timber, energy
investments. The endowments have been deep in real
estate for decades. There is a long history, following
the Stamford land grant, of investing in real estate
assets around Stamford’s campus and over the years
that evolved to really a globally diversified real estate
program. More recently that asset allocation topped
out at 22% about two years ago and it has been cut in half since, so we are down to 11%. We’ve been net sellers into this environment and we are really not seeing that much to buy right now. Those assets are being redeployed elsewhere and in our case, going abroad.
Nathan Fisher, Lumina: Lumina Foundation is a
brand new foundation and so are in the process of
building up our portfolio across a number of asset
classes. We’re about $1bn now. Overall our allocation is about 32% to domestic equity, 10% international
equity, 5% emerging markets, 10% hedge funds, and 15% is a portfolio we call an inflation hedge portfolio.
In terms of real estate, that actually falls in that
inflation hedge portfolio. We are trying to look at
diversification in the sense of how these assets are
going to function relative to the business cycle and
economic scenarios.
Pam Campbell,Washington University, St.
Louis:Washington University is a $4.1bn endowment. We have a 80% equity target, 20% in fixed income and of that 10% is in TIPS (Treasury Inflation Placement Securities). We have a new allocation to real estate, which has been approved just in the last year, of 5%.

Mark Anson, Chief Investment Officer,
Calpers: Out of around $180bn of assets, we have
about a 0.5% in cash and although we have a target
of zero for cash, the fact of the matter is that every
month we have to raise about $600m to pay our
benefits. We pay out almost $6bn a year in cash
benefits. Non-US fixed income is about 4%,
domestic fixed income is about 22% of the portfolio,
international equity is about 21%, domestic
equity – public equity about 40%, private equity
about 5% and right now real estate is at 7%. And
that is at the lower end of the range for real estate.
We have a range of seven-11% of real estate with
9% being our target. So with a 9% target we are
about 2% under weight.
Lynch: Mike, you had a 22% allocation at one point
in real estate. Stamford has now sold down, basically
starting with 2002, to the point that you are at 10-11%
Ross: That’s right.
Lynch: Do you still have that capital available to
redeploy into real estate?
Ross: Most of that capital has gone into international
investments of various kinds. If and when we
thought real estate offered us risk adjusted returns we
thought were more attractive than other options out
there, we would definitely come back in because
we’re very comfortable with the asset class. But it
has been a bottom-up approach based on what we
think we can buy, particularly domestically. So that
has us selling and not buying.
Lynch: Mark, I’ve read that you have initiated a filing
with the FCC to take that real estate technology
business that you have and actually create an IPO out
of that. Do you see Calpers utilizing vehicles such as
that as a way to access additional real estate within
the marketplace using a public/private partnership?
Anson: Over the last four years our head of real
estate, Mike McCook, has moved us to investing
27% on a net basis invested in capital and non-core
assets, opportunistic assets. When you look at our
commitments it is probably closer to 38 or 40% in
the non-core sector. We’ve sold off our timber and
put that back to work more productively in other
parts of our opportunistic portfolio and we’ll continue
to do that. The bottom line here is we see cap
rates continuing to go down. So where is the value
there? We see more value selling traditional properties
right now and we see more value in opportunistic
investments. Just to follow up on that point,
when Mike took over the portfolio we had no international
investments in real estate. Over the last two
years in particular we have pushed outside the borders
of the US and we will continue to do that. We
find good opportunities outside the US and we’re
trying to locate those and when we find them, we’re
going to snap them up.
Lynch: I’m going to compare and contrast your situation
with Pam’s for a second. Pam is a $4bn dollar
endowment, just starting in the real estate arena.
They have a 5% allocation, a little over $200m limited
to co-mingled funds. Now, while Calpers has
access to more opportunistic investments, by and
large most institutional investors don’t have that
access. Is there any advice that you could give other
investors on getting access to things like that?
Anson: Within the last two years we’ve invested in
co-mingled real estate funds. That is very different
for Calpers. And in a co-mingled environment you
can invest in smaller chunks. You don’t have to go
outright and buy and purchase the existing property.
Now we do that for a number of reasons. We’ve been
investing overseas like this. In these co-mingled
funds we would like to partner with someone who has
the experience overseas because we just don’t. I think
for a smaller investor there are opportunities out
there. We’re taking them as a larger investor but certainly
you don’t have to invest the same size amount
in a co-mingled fund as Calpers. You can certainly
invest in the same funds as we are but with a smaller
Campbell: We initiated a real estate allocation lat
year, which has a total return focus. We’re looking
for opportunistic investments and the one thing I
think about having a $200m target allocation is we
have the ability to go into smaller funds. We’re looking
at equity like returns, but we’re looking to lower
our domestic equity allocation, so that was really the incentive to establish the program. We are starting out with making commitments to five funds and we are very pleased with the opportunities we are seeing.
The one guideline of the program is that there will be no core investments and we do have a leverage limit, but it is 75%.
Lynch: Nathan, Lumina is a little different in that
you are not looking at a NPI (NCREIF Property
Index) type of benchmark, but an inflation hedge.
Fisher: We have no additional flow, we are not
expecting any other monies, so we are very concerned
about protecting the value of this portfolio.
Fluctuations are very, very deadly for us because we have a constant outflow of money. We want to have the assets there to come back in times where financial assets really get hit. When we look at real estate historically
it has shown some sensitivity to inflation.
We are trying to get answers to the question: “Is real estate homogeneous or are there other property types that could provide a little extra protection in an inflationary environment?” We ultimately have to have
equity-like returns, but it may turn out, that if we
angle this portfolio to property types which have
exhibited or expected to exhibit a little more sensitivity
to inflation we have to give up something in
return, or make that up through leverage or opportunistic
Lynch: Pam, when you’re looking at the strategies
that opportunistic fund managers are presenting to
you today are there any strategies that you find particularly
appealing from the manager’s perspective and
that compelled you to deploy capital to that manager?
Campbell: One of the strategies did have an Asian
focus and we’re very positive on international markets.
We also like smaller funds because we like the fund size to be in accordance with their opportunity set. Those are some of the strategies we have looked for.
Lynch: Mark, when you look at the landscape of real estate investments that are out there and the huge backlog of capital, and it is dramatic, where do you see pockets of opportunity for real estate investors today?
Anson: We are all in the same boat: just trying to
find those pockets of opportunity. Of course when
we find them, we really don’t like to disclose them
either! Again, it is pushing the envelope outside the
traditional comfort zone of Calpers. Pushing us to
international investments, we invest not only in
developed markets in real estate, we’re now into
emerging markets in real estate. Right now we’re trying to find that strong income yield wherever we can pick it up, so when we do find those pockets I guess we do like to keep them to ourselves.
Lynch: Mike and David: where you are seeing
unique or emerging opportunities within real estate,
whether domestically or internationally?

Ross: We are trying to go where capital is scarce.
And in a low interest rate environment that feels difficult
for us so we are perhaps shifting away from the
Western hemisphere. Over a 10 and 20 year period of
time the economic center of gravity will slowly move
from being dominated by the US market. To us in a
longer term sense there is going to be more diversification
that comes from other economies around the
globe that are going to operate a little more independently
from how the US. economy operates.
Lynch: What are your views on leverage within the
real estate portfolio?
Anson: We are generous. We have a limit, we can go
up to 50% leverage in our real estate portfolio and
we’re in the high or mid 40s in our leverage, and that
is up significantly on historic levels. If you go back
just a few years we were down at about 25 or 30% and
we had to go to the board and firmly ask to raise that
leverage limit. So if you look at our portfolio now, it
is at about $12bn on a net basis, but probably closer to
$18bn on a gross basis.
Ross: We are about 50% leveraged in real estate. In
general the way we view leverage on a long term
basis is it is really part of the risk conversation we had
with our board and we’ve defined that it is within our
risk tolerance to lever our real estate allocation to
about 50%.
Lynch: If you leverage your core real estate portfolio
at or about 50% is it still a core real estate portfolio?
Anson: We still consider it core. Now as we look
forward, in this interest rate environment that looks
like interest rates can only go in one direction, which
is up, we will reconsider what will be the appropriate
leverage but right now we are close to our limit and
we will take advantage of that as long as we can.
Lynch: And Pam, you have a 5% allocation. It is a
brand new asset class for you; why was the allocation
set at 5%, not some other number?
Campbell: From a practical sense it was a good
place to start and it was a good way to get an
approval. It is what we did with some hedge funds for
example, we started at 5% and then we went to 10%,
and then to 15% and now we are going to 20%. And
that was our goal from the start to get to 20%. It just
from a practical sense from our committee perspective
was a good way to go. Another thing is we are not
investing in all of real estate. We are not investing in
core real estate. We are only looking for opportunistic
so maybe it shouldn’t be as large.
Ross: I also think it’s not logical to have a real estate weighting that reflects the weighting of real estate in the universe of investable assets. I don’t know what the number is for total quantity of fixed income securities on the globe, relative to equity securities and real estate, but I’m pretty sure it is more than 10% and if it was 50% that doesn’t mean that was the right risk profile for us to invest in at that level. Real estate always models out very attractively but we are all a
little cynical of that modeling exercise.
Anson: We say: ‘Gosh, if there is 20-25% of
investable assets in real estate then why don’t you
have that allocation?’There are pragmatic issues why you may not be there. Let me give you a couple. First, let’s start with myself. I am the chief investment officer at Calpers, but I came from both the equity and the bond side. I have very little experience in real estate so I have a natural bias against it, because I don’t understand it very well. And that is not unusual. Most pension fund CIOs came from either the bond or equity side, not the real estate side. Again, that is not economic, just pragmatic. Another issue with regard to Calpers: it wasn’t so long ago at Calpers that stocks were considered alternative investments. Remember this was a state pension fund that was with bonds for a long time. Then we began to add stocks and then real estate and then private equity. And you just can’t jump 20% of a larger pension fund into real estate or any asset class like that. It takes time. So again, it is not always economics. There are sometimes pragmatic reasons why you may not be at what appears to be the appropriate allocation in the perfect theoretical world.
Lynch: What are the best and worst things about this asset class?
Russ: Best, the correlation aspect, relative to other
asset classes which helps reduce apparent risk in our
portfolio. The thing that drives us crazy is the same
problem that we have in private equity – the valuation
aspect of the return stream, but of course that is what
contributes to the low standard deviation - things are
priced irregularly.
Fisher: The best thing, I guess, is its role as a diversifier
compared with other asset classes. I would say
that probably the thing that drives me crazy is how to
make it the best diversifier.
Campbell: I think the best thing is it is inefficient, so
there should be opportunities. We haven’t been in it
long enough for it to bother me yet.
Anson: I think the best thing from a pension
fund perspective is the consistency of returns.
Real estate is a consistent performer through most
market cycles. Sometimes it is up a little, sometimes
it is down a little, but it doesn’t have the wide
asset swings that we have had even in our bond
portfolio from time to time and that is very comforting.
What drives me crazy are the valuation
issues that we all know: the price lagging, the
smoothing can go on through the appraisal
processes – which means you always don’t have
accurate estimates of volatility.