CalPERS Leads Record Year for Unloading Real Estate

Sales on the secondary real estate market more than doubled in 2015 versus the year prior, according to data from specialty firm Landmark Partners.

The California Public Employees’ Retirement System (CalPERS) offloaded an industry-leading $3 billion property package in November, contributing to US public pensions’ 63% share of all transactions by volume.

“Institutional investors have become more comfortable with the market’s ability to absorb large portfolio transactions.” “This demonstrates large institutional investors’ increased confidence in using the secondary market as a portfolio management tool,” Landmark stated in its report. “Pension funds continued to rebalance portfolios and reduce the number of non-core sponsor relationships in order to meet administrative and portfolio management objectives. Institutional investors have become more comfortable with the market’s ability to absorb large portfolio transactions.”

CalPERS fit squarely into that group. The $300 billion retirement system put assets on the block in June as part of a portfolio-wide “effort to reduce costs, risk, and complexity,” CalPERS’ real estate chief said at the time.

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Blackstone’s secondaries unit purchased the entire $3 billion package in November.

Endowments and foundations followed public funds as 2015’s second-most active sellers, although hardly more active than in the year prior. Transaction value climbed from $1 billion across 11 deals to $1.1 billion over 13, according to Landmark.

But those figures may not account fully for non-profits’ real estate deal flow. The dataset does not include all trades between limited partners—a private endowment to a family office, for example—which Landmark described as “naturally discreet and typically not publicly disseminated.”

Real Estate Secondaries 2015 Source: Landmark Partners

Investors will have to be more tactical opportunistic in their approach and willing to tilt portfolios from beta to alpha to ensure survival in a low-return environment, according to Mercer.

According to the consulting firm’s paper on investment themes, 2016 presents an “environment of heightened uncertainty and fatter tails,” from events such as China’s slowdown and central banks’ monetary policies.

“Alpha is challenging to find and is not a single homogeneous return source that may be captured by appointing active managers.”“With relatively few markets that can be described as ‘cheap,’ investors will be well-served by remaining patient but ready and able to act opportunistically when markets move to extremes,” said Deb Clarke, Mercer’s global head of investment research.

To add value amid the current unattractive risk/return tradeoffs of traditional beta, Mercer argued investors allocate more to active management—but only if they are able to tolerate fees and are skilled in manager selection.

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“It is important to recognize that alpha is challenging to find and is not a single homogeneous return source that may be captured by appointing one or more active managers,” the report said.

Mercer also argued investors should take advantage of reduced liquidity in traditionally liquid markets—like the US treasury and German bund markets—that could lead to periodic increases in price volatility in “gap moves”.

Contrarian investors have an even better advantage to capture opportunities in such periods of market stress, the paper said, through opportunistic and dynamic strategies.

Furthermore, a maturing credit cycle also calls investors to take a “more cautious stance,” Mercer said.

For those that are able to adjust market exposures dynamically over time, the consultant suggested tilting portfolios towards less volatile strategies such as low volatility equity, high-quality credit, and absolute-return fixed income.

Investors could also take advantage of high default rates and opportunities in distressed debt.

“Although this phase of the cycle could yet be a few years away, investors wishing to capitalize on such an opportunity may want to start considering the asset class and possible implementation approaches during 2016,” Mercer advised.