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February 2012

CalPERS to Dump Much of its Real Estate Portfolio

The California Public Employees’ Retirement System, the nation’s biggest public pension fund invested in residential housing and land deals, has prepared a significant amount of its real estate for sale at a huge loss, The Wall Street Journal reported Jan. 18.

CalPERS is selling its portfolio of 28 housing developments to a partnership formed between San Diego-based Newland Real Estate Group, LLC, and an affiliate of Sekisui House, Ltd., Japan’s largest home-building company. The portfolio, which makes up one-fifth of the pension fund’s residential land portfolio, includes 16,300 un-built home sites and thousands of acres of undeveloped land in 11 states.

The Journal reported that the deal is priced at between $500 million to $600 million, which valued each home site at $35,000. CalPERS bought the properties between 2002 and 2007, and at the time they were valued at between $75,000 and $150,000. CalPERS had hoped to avoid a major liquidation given that distressed sales by builders and banks have driven home and land values down by as much as 75 percent in some markets.

CalPERS started investing in real estate in 1992 at a time when housing prices were depressed, and the pension fund saw the investment as a way to reap big rewards. At first the program’s residential real estate investments made use of borrowed money for 25 percent of the purchase. Eventually that figure was raised to 60 percent.

CalPERS used debt to finance up to 80 percent of its purchases to help boost returns, but the move also magnified risk. The Journal reported that roughly 9 percent of the pension fund’s $226 billion in assets is invested in real estate. Before the financial crisis, CalPERS used proceeds from those real estate investments to pay its 1.5 million state retirees.

According to the Journal, the CalPERS real-estate portfolio lost $10 billion between March 2008 and June 2009, about half the portfolio’s value. But from October 2010 through September 2011, the pension giant said its real estate investments have returned a rate of 14 percent.

In 2011, the pension fund began transforming its real estate investment program, trying to sell down its portfolio and concentrate investments on less risky, income-producing commercial properties.

The North American unit of Japan’s Sekisui is one of the most aggressive foreign companies investing in the U.S.’s distressed housing market. In 2010, the company formed joint ventures to purchase 500 acres near Houston and another 4,000 acres near Seattle. Company President Satoshi Yoshimura told the Journal he saw the CalPERS purchase as a long-term investment.

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