SDCERS to invest $190 million in real estate by 2018

At a Sept. 19 board meeting, the San Diego City Employees’ Retirement System (SDCERS) approved a plan proposed by the pension fund’s investment consultant, Hewitt EnnisKnupp (HEK), to allocate $190 million to real estate by 2018. Additionally, HEK recommended that the pension fund allocate a separate $40 million to noncore funds in 2013.

The decision was made as part of an initiative to raise the real estate allocation in SDCERS’ portfolio from its current level of 9.8 percent ($570 million) to the target level of 11 percent. HEK has recommended the $5.8 billion pension fund begin by allocating $20 million each to Mesa West Real Estate Income Fund III and Europa Fund IV in 2013.

Mesa West Real Estate Income Fund III is a value-added real estate debt fund managed by Mesa West Capital. It will invest in first mortgages for commercial real estate properties in the United States. The pooled fund has a target close date of Sept. 30, 2013, and a fundraising goal of $850 million. Approximately $706 million has been raised to date.

Europa Fund IV, managed by Europa Capital LLP, is an opportunistic fund with a target close date of Sept. 30, 2013, and a fundraising goal of $923 million. Approximately $179 million has been raised to date. The pooled fund will primarily invest in the United Kingdom, Germany and France, and will focus on repositioning real estate, loan restructuring, acquiring prime assets and recapitalizations of assets or loans where the fund will act as the new borrower or sponsor.

Following these commitments, HEK recommends the pension fund commit $40 million to noncore funds every year until 2016. Furthermore, the investment consultant recommends SDCERS commit $30 million to core funds in 2014, followed by $20 million to core funds in 2015 and $18 million more in 2016. According to HEK, this should bring the pension fund’s core/noncore allocations to a 65 percent/35 percent split, which will still be short of the fund’s target allocations for core/noncore investments of 70 percent for core and 30 percent for noncore. Currently, SDCERS has a core real estate allocation of 62.7 percent and a noncore real estate allocation of 37.3 percent (as of June 30, 2013).