The value of residential real estate investments owned by the country’s largest public pension fund has plummeted 35% -- a paper loss of $3.3 billion for current workers, retirees and their state and local government employers.
The California Public Employees’ Retirement System reported Wednesday that in the year ended June 30 its real estate portfolio declined to $6.08 billion from $9.36 billion, based on 461 independent appraisals of its investments in 288,000 housing units across the country.
The decline in real estate represents a portion of CalPERS losses since the fund hit a high of $247.7 billion on June 30, 2007. It fell to $239.2 billion a year later and since then has plunged a further 23%, to $184.2 billion as of Monday.
CalPERS provides pension benefits for 1.6 million current and former employees of the state and many local governments and school districts. Those employers, which are suffering from strained budgets, could be forced to increase their contributions to the pension fund if CalPERS’ investment performance does not turn around in the next couple of years.
“It’s certainly frightening for those who look forward to getting their pensions from the California system,” said Gary Painter, director of research at the Lusk Center for Real Estate at USC.
The loss in investment value, though significant, is not surprising given the meltdown in the real estate market, said Ted Eliopoulos, a senior investment officer for real estate at CalPERS.
“No one escaped the housing fall, not CalPERS, not the rest of the country, not the prognosticators nor the Federal Reserve,” he said.
According to the report produced for CalPERS by Le Plastrier Development Consulting of Irvine, the loss in value was amplified by CalPERS’ reliance on loans to ramp up housing investments to a peak of about 20% of its real estate portfolio. The investments were over-concentrated by age, geography and product type and lacked safeguards against a market decline, Le Plastrier said.
Within CalPERS’ portfolio, 80% of the properties are in distressed markets in California, Arizona, Florida and Texas. Along with that of other investors, CalPERS’ stake in housing “expanded greatly between 2004 and 2006,” CalPERS staff said in a briefing for the board’s investment committee. The committee is scheduled to meet Monday.
The boost came “in response to attractive opportunities in markets with strong economic growth, high employment, projected population and employment growth and attractive demographics and demand,” the briefing said.
The loss in value includes a portion of CalPERS’ $970-million majority stake in the failed LandSource Communities Development, which was developing a 15,000-acre tract near Santa Clarita.
The fate of the property, known as Newhall Ranch, rests with a federal bankruptcy judge.
CalPERS is likely to try to hold on to its other housing investments in hopes that they eventually recover in value, Eliopoulos said.
“CalPERS is uniquely positioned with both a long-term investment horizon and also substantial assets,” he said. “So we can afford to wait out bad market cycles and not be forced to sell into a down market.”
In the meantime, the fund and its consultants are reviewing its participation in dozens of real estate partnerships.
“We intend to keep the vast majority of our assets, and our long-term horizon enables us to be patient,” said investment committee Chairman George Diehr. “If the market values increase over time, we can expect cash flow back and a return on our capital.”
That’s probably a good strategy, because “selling would just exacerbate the negative return, and there may not be better alternatives,” said Painter of the Lusk Center.
CalPERS’ experience is an important lesson about “doing a little more homework” before getting caught in a real estate bust, said Molly Carmichael, a senior vice president at John Burns Real Estate Consulting in Irvine.
“I think CalPERS can be smarter in the long run,” she said.
“Hopefully, they really can scrub the market and get under the hood and find out what’s going on. They need someone to come in and give them an action plan about what to hold and what to sell.”