I 5 Real Estate Investment Program

Transcription

1 I 5 Real Estate Investment Program Prepared for the Committee on Investments December 13, 2011

2 Real Estate Industry Update: FY 2010/2011 Valuation growth returned to the real estate industry following the market turmoil of the prior several years. Property market demand d is slowly l recovering; rental rates rising i in select markets. Essentially no new construction, plus some inventory loss to obsolescence. Thus base case outlook for supply/demand fundamentals is relatively positive, even in a prolonged slow-growth macroeconomic scenario. Pricing is attractive relative to the yield on 10-year Treasuries and demand is high for stable properties in primary markets. Debt capital is still problematic and the distress overhang remains; but LIBOR life support is still carrying many properties along. UC Real Estate Program 2

3 Real Estate Program Overview: 9/30/11 Program inception - October 2004 Current funding status: $2.2 billion market value 5.0% of Total Plan versus 4.7% short-term and 7.1% long-term allocation $750 million in unfunded commitments Program includes: 34 investment managers and 51 investment vehicles in total 7 Open-End funds ($601 million market value*) 37 Closed-End funds ($1.1 billion market value*) 6 Separate Accounts ($411 million market value*) 1 Public Securities account ($67 million) Program is in compliance with policy guidelines: By strategy, property type, geography, and manager concentration limits Portfolio leverage at 47% *Private Real Estate is reported with a one-quarter lag. UC Real Estate Program 3

4 Real Estate Strategy Allocation: 9/30/ % 90.0% 80.0% 70.0% 60.0% 50.0% 40.0% 0% 30.0% 20.0% 10.0% 0.0% Core Value added Opportunistic Public Securities Current Target Minimum Maximum NOTES: [1] Actual allocations do not include unfunded commitments by strategy. [2] Private Real Estate is reported with a one-quarter lag. UC Real Estate Program 4

5 Real Estate Investment Plan: Strategy Increase emphasis on stable income generation Increase allocation to Core strategies Primary focus on implementing the Separate Account program Flexibility in managing portfolio Control over liquidity decisions Tactical diversification (property type and geographic location) Lower fees (charged when invested, not committed) Core = income-producing properties, stable occupancy, low leverage Reduce focus on appreciation gains Decrease allocation to Value-added d strategies t Value-added = assets with correctable flaws, moderate leverage Take advantage of opportunities arising from economic/capital market environment Increase allocation to Opportunistic strategies Opportunistic = redevelopment, repositioning, higher leverage UC Real Estate Program 5

6 Property Type Diversification: 9/30/11 40% 35% 35% 38% 30% 25% 23% 20% 15% 10% 17% 10% 16% 18% 13% 15% 11% 5% 2% 3% 0% Apartments Office Industrial Retail Hospitality Other* UC Private Real Estate Portfolio NFI ODCE *Other includes student and senior housing, self-storage and land. UC Real Estate Program 6

7 Real Estate Investment Plan: Property Trends Office sector expected to lag recovery. Multi-family fundamentals strong and expected to continue to outperform. Industrial experiencing a resurgence of demand in select port markets and supply chain corridors. Retail performance bifurcated between necessity and luxury retail and expected to remain slow through recovery. Other property types Hotels expected to outperform; Central Business District hotels in metros with diverse demand d drivers are of interest t Student and senior housing, medical office and self-storage of interest due to uncorrelated demand drivers. UC Real Estate Program 7

8 Geographic Diversification: 9/30/11 40% 35% 30% 34% 32% 25% 20% 15% 10% 5% 19% 19% 15% 13% 7% 8% 1% 2% 10% 7% 6% 9% 6% 4% 9% 0% Northeast Mid Atlantic East North Central West North Central UC Private Real Estate Portfolio Southeast Southwest Mountain Pacific Int l NFI ODCE UC Real Estate Program 8

9 Real Estate Investment Plan: Geographic Trends Markets are bifurcated with trophy metro areas experiencing higher volume of transactions. Monitoring the spread between primary and non-primary markets, core and non-core assets Internationally, growth markets are expected to outperform. Emerging markets have the healthiest outlook; real estate exposure there is heavily weighted to development Eurozone crisis is worrisome but may provide distressed buying opportunities for stable assets in primary markets Select Asian and Latin American markets expected to outperform UC Real Estate Program 9

10 UCRP Real Estate Portfolio Performance: 9/30/11 Periods ending 9/30/2011 Quarter 1 Year 3 Year 5 Year Open-End Funds 5.4% 23.0% -15.2% -5.9% Closed-End Funds Separate Accounts % 23 8% Total Private Real Estate 4.8% 23.8% -18.5% -8.2% Private RE Policy Benchmark Variance Public Real Estate Securities -14.8% -4.2% 7.2% - Public RE Policy Benchmark *Private Real Estate is reported with a one-quarter lag. Variance UC Real Estate Program 10

11 GEP Real Estate Portfolio Performance: 9/30/11 Periods ending 9/30/2011 Quarter 1 Year 3 Year 5 Year Open-End Funds 9.2% 28.4% -22.9% -11.7% Closed-End Funds Separate Accounts % 24 8% Total Private Real Estate 5.4% 24.8% -17.2% -5.2% Private RE Policy Benchmark Variance Public Real Estate Securities -15.2% -4.7% 7.1% - Public RE Policy Benchmark *Private Real Estate is reported with a one-quarter lag. Variance UC Real Estate Program 11

12 Looking Ahead: 2012 Primary focus on deployment of separate account commitments Continue building portfolio with distressed core or value-added assets. Will consider selective re-ups in new commingled funds with compelling existing investment managers only. May seek additional value-added separate account advisors to add to the direct investment program. Increase exposure to niche property types with demand drivers that are uncorrelated to the broader real estate markets. Increase exposure to international markets for diversification. UC Real Estate Program 12