Pension Funds Look for Green Pastures in Real Estate Market

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Building of skyscrapers has come to a grinding halt in Dubai due to the global recession and its effects on the UAE economy. Dubai World, owner of several skyscrapers in Dubai, reached an agreement with over 99 percent of its creditors by value to restructure around $24.9 billion of liabilities last year. Photo - Mosab Omar/Reuters

As property prices began to crash with the financial crisis, some of the largest pension funds in the US are beginning to take a step back from investing in fancy properties.

Pension funds are some of the biggest investors in commercial real estate in the States. But in the wake of the financial crisis they are making a wise by moving away from risky projects to safe havens like properties that involve well-leased buildings with stable income, in cities such as New York, Washington and San Francisco.

Skyscrapers are soaring to save space and limit the number of buildings. Pension funds such as the giant California State Teachers’ Retirement System and the Texas Municipal Retirement System have thus been prompted to look elsewhere.

“We believe the reason for this pricing increase” for the buildings in these markets “is a significant demand for core assets from private and public buyers along with overseas investors,? says Mike Di Re, director of real-estate investments for the California teachers’ fund, known as Calstrs. Capitalization rates, a measure used by real-estate investors to estimate the annual return of income-producing properties are being compressed now, as the income form buildings do not rise as predicted.

In May, a 36-story Manhattan tower at 750 Seventh Ave. was sold for $485 million with a capitalization rate of 4%, according to Real Capital Analytics. At 1540 Broadway, a similar 44-floor building nearby got sold for $355 million with a 6% capitalization rate in 2009.


In a business plan posted last month on its website, Calstrs said that in the future, the fund will target real-estate assets that “are in need of capital infusions to cure short-term leasing challenges? as they are cheaper. It plans to bring down its real estate allocation target to 8% from 10%. Others funds reducing their spending in such markets.

“We have found that the highest-quality assets tend to stay leased when times are tough and command the strongest rents in times of recovery,” said Douglas A. Schwartz, a managing director with J.P. Morgan Asset Management. The real-estate fun had purchased a pair of downtown Seattle office buildings at what brokers say are among the highest prices on a per-square-foot basis ever paid for the downtown area, last week.

An index of commercial-property values by Green Street Advisors, that focuses more on high-end buildings, has seen a rise of more than 45% from its 2009 lows and is only 10% below its all-time highs. The index has been flat for 2 months, but the figures bring into question the contrast between the surging prices and sluggish economy.


Townsend Group, a pension consultant, says the fund managers have yet to invest that money although pensions and other large investors have committed $9 billion to funds that invest in core assets. There are a lot of funds that are sitting idle because of the lack of attractive opportunities. But some pension funds are sticking with trophy assets partly because the market fluctuations have made them unsure of where to invest and so they prefer to stick to the stable assets.

The recent rush into core properties was a result of many pension funds losing a lot of money in the more-speculative developments. Calpers, for instance, wrote off nearly $1 billion for a 2007 investment in a busted land project.

During the previous boom, many pension funds approached properties with short-term leases. They were believed to have more profit potential despite the risks.

A British pension fund names Hermes Real Estate Investment Managers Ltd., is making its first US real-estate investment with a $150 million allocation to a fund run by Hampshire Real Estate Co.

Chris Taylor, chief executive at Hermes believes “pricing is looking quite stretched.? “Therefore, we will be focusing on retail-oriented properties in North and South Carolina, Georgia and Florida instead of Manhattan, Washington and other major cities,” he added.


In terms of investing in real-estate in the UAE, the picture is still risky although the prices of properties have come down.

Based on a real estate analysis report released earlier this year, average property sales dropped 30% from the original purchase price. Rental rates in more established areas have also continued to drop.

Real estate prices in Dubai fell 1.7% in February and are predicted to fall up to 30% in the next two years. The latest figures from Deutsche Bank show that although the pace of decline has slowed down, it does not mean that it will come to a halt soon. “We do not see any improvement in fundamentals that could trigger a recovery,” the German bank said in its report.

Residential property prices in Dubai have now fallen by 62% since the 2008 global recession. “We believe the UAE property sector is undergoing mid-cycle dynamics. House prices have corrected by 45 to 55% but rising oversupply could see a further 25 to 30% drop in the next two years,” Rasmala, an investment bank noted.

The global economic situation is affecting every area, and safe bets on investments are getting hard. “In such a situation, it is only wise to play it safe and hope for a change of events, while governments take measures to better the situation”, the bank concluded in its report.

Sources: Wall Street Journal, Financial News, IP Real Estate, Property Wire

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