CalPERS ditching Stuy Town investment strategy

The California Public Employees’ Retirement System considers ban on investments with private real estate fund managers looking to convert rent stabilised apartments into market rate units, a strategy employed in the Peter Cooper Village and Stuyvesant Town deal in Manhattan.

The California Public Employees’ Retirement System is set to ban investments with real estate fund managers who use strategies similar to those employed in the Stuyvesant Town and Peter Cooper Village apartment complex deal, in which CalPERS invested $500 million.

The strategy of converting rent-stabilised apartments into market rate units will no longer be permitted under a new real estate policy set to be debated by the $213 billion pension’s funds investment committee next Monday.

Pension staff officials are recommending CalPERS adopt more “responsible property investment by prohibiting excessive rent increases and the involuntary displacement of low income households in rent-regulated multi-family housing”. The officials’ report states that a clear policy to protect rent-regulated multi-family housing is needed owing to CalPERS’ investments in limited partnerships and the fact it has little or no control over the strategies being used by its investment managers.

The report went on to warn that aside from the financial risk associated with such investments, tenant groups voicing their concern over fund managers’ strategies – some of which involved unlawful evictions – pose a threat to CalPERS’ reputation as a responsible investor.

The California pension has come under growing pressure in its home state about its investments in multifamily deals, with lawmakers recently introducing legislation – Assembly Bill 2337 – aimed at prohibiting investment strategies that displace low income households . The proposed legislation, however, would also prohibit CalPERS and its neighbour, the California State Teachers’ Retirement System, from investing in the creation and preservation of affordable housing.

CalPERS invested $500 million in the Stuy Town deal in2005, bought by Tishman Speyer and BlackRock in 2006 for $ 5.4 billion. Other US public pensions, including Florida State Board of Administration and CalSTRS have written off their equity investments in the apartment deal of $250 million and $100 respectively.

After buying Stuy Town, Tishman and BlackRock planned to convert 57% of the rent-stabilised properties at Stuy Town into market rates but, New York’s Supreme Court later ruled in 2009 that the firms could not convert market rates while also claiming state tax credits. The ruling is believed to have huge implications for many landlords in New York, who have also employed a strategy of converting rent stabilised properties into market rates.

CalPERS said it would not prohibit investment strategies that include the demolition of existing rent-regulated housing, so long as the new housing was also rent-regulated, and displaced tenants received relocation benefits according to state or federal laws.

CalPERS’ real estate portfolio recorded losses of -48 percent in the year to the end of September 2009, according to an internal performance report by CalPERS’ staff. The report said CalPERS would now “pursue new core investment opportunities that will benefit from improving fundamentals anticipated during the economic recovery”.

Consultant Pension Consulting Alliance will also present a report to the investment committee on Monday. The report warns that CalPERS’ investment strategy from 2002 increased the overall risk of the pension’s real estate portfolio namely because it allowed higher amounts of leverage to be used in deals, gave investment partners more discretion and resulted in a shift away from stabilised core investments into non-stabilised opportunistic investments. PCA said opportunistic investments now comprised more than 40 percent of CalPERS’ real estate holdings.