CalPERS takes leap into Chinese, Indian property http://today.reuters.com/business/newsarticle.aspx?type=reutersEdge&storyID=2006-03-28T111507Z_01_HKG38412_RTRUKOC_0_US-PROPERTY-ASIA-CALPERS.xml
Tue Mar 28, 2006
By Dominic Whiting, Asia property correspondent
SHANGHAI (Reuters) - The biggest U.S. pension fund, CalPERS, is on the verge of making its first investments in home building in India and China as it looks overseas to spend a growing allocation for property, an executive said on Tuesday.
The California Public Employees' Retirement System (CalPERS) wants about half of its property investment to be abroad within five years, against about one-tenth now.
At the same time, the money it devotes to property is set to rise to around 9-10 percent of the $183 billion fund by the end of this year, from 6.8 percent now, according to Michael McCook, CalPERS' senior real estate investment officer.
"Asia is going to be a major player in the long term," McCook told Reuters on the sidelines of a property conference in Shanghai. "But we don't go for speculative returns, we're not swinging for home runs in international markets."
CalPERS will seal a deal with private U.S. developer Hines Interests L.P. in the next month to create a joint fund of around $400 million for developing residential and retail property in Beijing and Shanghai, McCook said.
"We'll probably wind up funding $250 million to $300 million over three years," McCook said, adding that the fund's spending power would be boosted by borrowing to around 65 percent of assets.
McCook said he expected annual internal rates of return (IRR), after tax, of around 15 percent.
Its own rules prevent CalPERS from investing in Chinese stocks as China fails to satisfy the fund's investment criteria on issues such as human rights, market transparency and freedom of labor unions.
But McCook persuaded CalPERS investment committee that its standards on criteria such as pay and conditions of workers were met by the proposed property trust partnership with Hines.
"Three members of the board came in November to look at equities and alternative investments," McCook said. "They liked real estate."
In India, which does meet CalPERS stock investment criteria, the fund will contribute around $100 million to a $400 million fund for building housing in New Delhi, Mumbai and Bangalore.
McCook said the fund's developer partner was a subsidiary of a publicly listed Indian firm, but he declined to identify the company or the other shareholders in the fund.
Economic growth rates of 8-9 percent are encouraging mass urbanization in India and China, which are both home to more than one billion people. An estimated 8.5 million people are teeming into Chinese cities every year, while India faces a shortfall of around 20 million homes, according to the government.
But while most new urban dwellers are poor, foreign investors are keen to tap the very top-end of the market where profit margins are widest.
U.S. investment bank Morgan Stanley (MS.N: Quote, Profile, Research), for example, has teamed up with Chinese and Indian developers, while private equity firms Warburg Pincus and J.P. Morgan Partners have also been circling Indian companies.
Developers in both countries are keen to expand from their regional bases to become national players. In China, developers face a clampdown on bank lending, so foreign capital is even more valued.
McCook said CalPERS would also start funneling funds into Chinese property through its $200 million share of a $350 million fund managed by Japan's Secured Capital Group and its $400 million investment in a $1 billion fund managed by AETOS Capital.
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