NEW YORK, Dec 20 (Reuters) - Calpers, the largest U.S. pension fund, has raised its target for real estate investment to a 24-year high of 10 percent of its assets, as the credit crisis presents bargains to the cash-rich institutional investor.
“As a big pension plan, we’re not as dependent upon borrowing as a lot of investors,” Clark McKinley Calpers spokesman said on Thursday. “We feel like we’re really in a good position. We have some great opportunities out there to make good deals.”
The California Public Employees’ Retirement System, with a a fund value of about $250 billion, has raised its target allocation for real estate investment from 8 percent to a level unseen since 1984. The target can range 3 percent either way, to a low of 7 percent and a high of 13 percent, Calpers said.
Calpers’ board sets the allocation targets every three years and can tweak them yearly as conditions change.
Although defaults in commercial real estate remain negligible, fear and confusion in the overall credit market abruptly has restricted the generous lending which drove the commercial real estate boom during the past five years, according to Real Capital Analytics.
The credit crunch, which can be traced back to subprime mortgage problems of home buyers, has caused all types of investors to demand more for the risk involved in investing. As a result, borrowers have found mortgages and other types of loans more difficult and expensive to get.
For U.S. office properties, average prices have declined while sales fell 55 percent in November to $7 billion, according to Real Capital.
The average cap rate -- the yield that buyers get in exchange for their investment -- rose to 5.8 for a downtown office building, from about 5.5 percent in October, according to Real Capital Analytics.
The average price of $279 per square foot was significantly less than the average offering price of $400 per square foot.
Sales of apartment buildings fell to their lowest level in more than three years to just over $3 billion and down 70 percent from the year-earlier quarter. Cap rates for mid- and high-rise buildings rose to 5.6 percent from about 5.35 percent, according to Real Capital Analytics.
The average price fell to $172 per square foot, from slightly less than $200 per square foot.
”Even though we’re seeing weakness in the market, we’re pretty optimistic about the prospects for real estate as a hedge against inflation as well because the good deals are out there, particularly in the international arena,“ McKinley said.”
”From a real estate prospective, what you’re seeing is a recognition of commercial real estate as being a bona fide, legitimate asset class,“ Brian Stoffers, president of CB Richard Ellis Group (CBG.N) Capital Markets,” said.
The real estate allocation is earmarked for private purchases of commercial real estate as well for publicly trade real estate investment trust securities (REITs).
Commercial mortgage-backed securities (CMBS) come under the fixed-income umbrella. (See www.reutersrealestate.com for the new global service for real estate professionals from Reuters) (Reporting by Ilaina Jonas, editing by Richard Chang)