CalPERS Real Estate Investments Take A Beating

Posted by: Chris Palmeri on November 13, 2008

The $189 billion California Public Employees’ Retirement System, the largest and most closely watched pension fund in the country, has revealed a huge hit to its real estate portfolio. Its housing related assets are down 35% to $6.1 billion as of June 30. Until recently, the big fund was still reporting double-digit increases in its real estate investments. According to a report that will be presented to the fund’s investment committee on Nov. 17, CalPERS’ overall real estate portfolio is down 11.2% for the fiscal year that ended in June.

The fund seems to have made some very basic investment mistakes, including over concentration in its once red-hot home market of California. Among its biggest disappointments is a nearly $1 billion investment in a partnership involving homebuilder Lennar, forestry giant Weyerhaeuser and private equity firms Cerberus and MacFarlane Partners. That partnership, called Land Source, is now in bankruptcy. A report prepared for the fund by independent consultant Le Pastrier Development Consulting found that high-levels of leverage contributed to the volatility of the fund’s housing investments.

CalPERS, known for agitating for corporate governance changes at big companies it invests in, is adjusting its own policies in the wake of the real estate debacle. The fund is busily restructuring its partnerships to reduce debt. In the future, real estate investments will have to pass muster with an internal review committee, an independent fiduciary and a board consultant. CalPERS is still looking for a new chief investment officer. The fund’s previous top manager, Russell Read, bailed out last spring.

Reader Comments

Snoz

November 13, 2008 2:53 PM

Aphorism: If you repeat a lie enough times, people will believe it. Not satisfied with instigating the dot-com bust, California "investment" scamers went on the prowl for its next set of victims in 2004. They found it in real estate. Surreptitiously, California and its real estate groups tantalized and then seduced the ingenue with the idea that California real estate is the safest investment in the world, prices appreciating hand-over-fist, year after years. Its most popular and specious sales pitch: "God made only so much real estate. Donald Trump became a millionaire through real estate. You too can be a millionaire through no-money down real estate investment." Unfortunately for California, it believed in its own lie. Having built its economy upon real estate as one of its principal pillar, California's economy is now at the thrust-hold of paralysis as its real estate bet has collapsed. Having made its bed, California must now lie in it. Having mislead so many others, California must atone for its deception. The forthcoming punishment shall be great. Without massive tax increases, California will be bankrupt within 2010 as the state plunges further into red ink at the rate of $10Billion/year. To meet California's debt obligations, its governor had repeatedly refinanced its bonds; squeezed as much fees as possible from Indian casinoes and state lottery; extracted concessions from labor unions; reduced assistance to the impoverished; freeze hiring of state workers; slashed spending to the bone and then broke into the bone; and finally has pending massive tax bills before the lawmakers. Even before the ominous clouds gather, the wise ones will have made their exodus from the land of scamers. Until the last of the evil money-hungry, dishonest, real estate scamers are driven from California, its people will never live in peace.

sammy

November 15, 2008 12:31 PM

I have relatives that will rely on CalPers to fund their retirements.

Having said that, maybe now CalPers will return to the business of managing retirements. It has gotten distracted with being a gorilla "activist investor" that interferes with the running of companies whose stock the fund owns.

It's important to remember that CalPers management doesn't own the stock- the public employees of California do. Rewarding or punishing companies based on the personal whims of CalPers personnel is not fufilling the fiduciary responsibility they have.

Manage the money. Don't push agendas please.

Christopher Lund

November 25, 2009 4:03 PM

Please visit www.epa-tenants.org for information on a $100 million CalPERS multi-family investment in the San Francisco Bay Area that is in jeopardy.

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About

BusinessWeek editors Chris Palmeri, Prashant Gopal and Peter Coy chronicle the highs and lows of the housing and mortgage markets on their Hot Property blog. In print and online, the Hot Property team first wrote about the potential downside of lenders pushing riskier, "option ARM" mortgages and the rise in mortgage fraud back in 2005—well ahead of many other media outlets. In 2008, Hot Property bloggers finished #1 in a ranking of the world's top 100 "most powerful property people" by the British real estate website Global edge. Hot Property was named among the 25 most influential real estate blogs of 2007 by Inman News.

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