11/05/2008

Crisis Forces Pensions to Curb Investments . . .

The financial crisis has significantly reduced the asset sizes of public pension systems, forcing many to curb or scrap real estate commitments for the foreseeable future.

Plunging stock and bond values have caused some systems to shrink in size by 20% or more this year, with much of the decline coming in recent weeks. For example, Calpers, the nation's largest pension system, now has $190 billion of assets, down 21% from the end of June. Calpers took an especially sharp blow because it has been heavily invested in stocks globally. Many other systems have suffered asset declines of 10-20% this year.

Allocations for investments in specific sectors - including real estate - are tied to a pension system's asset size. As the asset base shrinks, so does the capacity for new commitments. The problem in some cases is being magnified for real estate, because stock and bond prices have fallen faster. That means the proportion of real estate investments has grown, causing systems to reach or exceed their real estate allocations. At the same time, the soft property market has slowed real estate funds from liquidating investments. That is limiting profit distributions to pension systems, further curbing their capacity for new investments.

The impact of declining assets was seen earlier this year. Commitments to real estate funds, separate accounts and joint ventures by the biggest public pensions fell by nearly 30% in the first half, partly because of asset declines.

Some pensions remain under their target allocations for real estate and still have leeway to invest. But an increasing number of systems plan to either slow their pace of commitments to a crawl next year or make no new commitments at all.

Some examples:

*Alaska Permanent Fund, which has committed $1.25 billion to separate account managers since 2006, including $450 million this year, is unlikely to allocate any additional money for the time being.

*Ohio Public Employees planned to buy $549 million of properties this year through separate accounts, but has acquired only half that amount. The pension system is now taking a "guarded approach to new acquisitions due to pricing concerns," according to a recent report. A planned $100 million commitment to core open-end funds this year never took place for the same reason.

*Ohio Police & Fire planned to make $162 million of commitments through February 2009. It has scaled back that amount to $104 million. So far, $75 million has been committed.

*Massachusetts Pension Reserves has decided that it won't buy any more value-added properties for at least six months. It has acquired $92 million of such properties since May 2007, and originally planned to make $100 million of additional acquisitions over the next 6-12 months.

*Sacramento County Employees has delayed a plan to commit $75 million to value-added U.S. or global funds. It will review the plan in the first quarter with general consultant Mercer Investment Consulting.

*Iowa Public Employees, which has reached its 8% target real estate allocation because of a shrinking asset base, doesn't anticipate any fresh commitments to its separate accounts.

*Florida State Board has decided to wait until at least the middle of next year before analyzing whether to increase its international real estate investments.

Because of decreased liquidity, several pensions have taken steps to raise cash. For example, California State Teachers is seeking a $2.5 billion boost in its buying power by putting mortgages on core properties in its portfolio. And Alaska Permanent Fund has been quietly shopping a handful of seasoned properties, although market players say that the system has indicated it is not in a must-sell situation and won't accept low-ball bids.

Meanwhile, San Bernardino County Employees this spring sold a stake in a value-added fund to a secondary fund operated by Landmark Partners in order to free up capital. Market players said that if investment funds continue to limit profit distributions, more pension systems are expected to shop their fund stakes in the secondary market.

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