CalPERS to take a leap into Chinese, Indian property

Shanghai, March 28 | Updated: Mar 29 2006, 05:30am hrs
The biggest US pension fund, California Public Employees Retirement System (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.

CalPERS wants about half of its property investment to be abroad within five years, against the present level of about one-tenth. At the same time, the money it devotes to property is set to rise to around 9-10% of the $183 billion fund by the end of this year from 6.8% now, according to CalPERS senior real estate investment officer Michael McCook.

Asia is going to be a major player in the long term, Mr McCook told Reuters on the sidelines of a property conference in Shanghai. But we dont go for speculative returns, were not swinging for home runs in international markets.

CalPERS will seal a deal with private US developer Hines Interests LP next month to create a joint fund of around $400 million for developing residential and retail property in Beijing and Shanghai, Mr McCook said. Well probably wind up funding $250 million to $300 million over three years, he said, adding the funds spending power would be boosted by borrowing to around 65% of the assets.

Mr McCook said he expected an annual internal rates of return (IRR) after tax of around 15%. Its own rules prevent CalPERS from investing in Chinese stocks as China fails to satisfy the funds investment criteria on issues such as human rights, market transparency and freedom of labour unions. But Mr 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, he said. They liked real estate.

In India, which does meet CalPERS stock investment criteria, the fund will contribute around $100-400 million for building housing in New Delhi, Mumbai and Bangalore.

Mr McCook said the funds developer partner was a subsidiary of a publicly listed Indian firm.

Economic growth rates of 8-9% are encouraging mass urbanisation in India and China. 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.

US investment bank Morgan Stanley, for example, has teamed up with Chinese and Indian developers, while private equity firms Warburg Pincus and JP Morgan Partners have also been circling Indian companies.

Developers in both countries are keen to expand their regional bases to become national players. In China, developers face a clampdown on bank lending, so foreign capital is even more valued. Mr McCook said CalPERS would also start funnelling funds into Chinese property through its $200 million share of a $350 million fund managed by Japans Secured Capital Group and its $400 million investment in a $1 billion fund managed by AETOS Capital.