There has been a significant number of pension fund allocations to REIT managers over the past 12 months. This has been especially true of pension funds that have already established a strong real estate portfolio. A public real estate mandate is a good complement to an existing direct real estate program, and it is likely that pension funds will continue to allocate capital to this part of the real estate sector in 2006.

Many pension funds invested in REITs for the first time last year. Those included Sacramento County, Arizona State Retirement System and Wisconsin State Investment Board. For these pension funds, two major factors led them to investing in publicly traded securities now and for the foreseeable future. One, REIT-allocated capital can be invested in the marketplace quickly. Many pension funds have been frustrated that capital being allocated to private equity real estate has not been put to work for several months.

Secondly, REIT investment allows pension funds access to property types they would have great difficulty investing in their own. An example of this would be regional malls, where much of the best quality assets are now in the hands of public REITs. On the same page, many pension funds wouldn’t mind having a piece of the top-of-the-line hotel assets under REIT control.
—Jon Peterson

2005 Pension Fund REIT Allocations

Name	REIT Allocation	Percent of Total Assets	Decision Date	Manager Hired
Public School Teachers’ Pension and Retirement Fund of Chicago(1)	$35M	2% of $11billion	mid November	Adelante Capital Management
Virginia Retirement System(2)	$225M	1.5% of $46 billion	June and August	Urdang and Wellington
Alaska Permanent Fund(3)	$300M	0.03% of $32.3 billion	mid September	AEW Capital Management
San Joaquin County Employees’ Retirement Association(4)	$25M	1.6% of $1.76 billion	September	Invesco Realty Advisors
Wisconsin State Investment Board(4)	$100M	.001% of $66 billion	mid July	Heitman and AEW
Police Retirement System of St. Louis(5)	$50M	5% of $670 million	July	Urdang
Arizona State Retirement System(6)	$132M	.005% of $22.4 billion	early October	Urdang and Clarion
Sacramento County Employees Retirement System(7)	$150M	3% of $5 billion	mid December	Principal and Urdang

Notes:
1. This investment was part of a search by the pension fund to invest with minority or women-owned investment firms. Morgan Stanley and Urdang Securities Management are the other two REIT managers.
2. Virginia awarded a $150 million allocation to Urdang in June. The pension also invested a total of $75 million with Wellington Unit Investment Trust during August and November.
3. The pension chose to move half of its $600 million held in domestic REITs into a global strategy, and it plans to make more moves with REITs in 2006.
4. This is both pension funds’ first investment in REITs. Both Heitman Real Estate Securities and AEW Capital Management were allocated $50 million.
5. Urdang Securities Management was approved for an initial allocation of $20 million. There will be another $30 million funded at a later date. The exact timing on this hasn’t been established.
6. The pension fund has two REIT investment programs. One of these is an active REIT program that covers 75% or $102 million of the overall REIT allocation. The pension fund has funded $25 million of this to Urdang Securities Management. There will be another $25 millon given to the manager at a future date. The pension fund has an initial funding of $30 million to Clarion Real Estate Securities. Another $20 million was set to be funded to the manager in the fourth quarter. The second part of the REIT program is a passive one. This is managed in-house by the pension fund. This covers 25% of the REIT allocation or $30 million.
7. Sacramento County selected Principal Global Investors and Urdang Securities Management for its first ever REIT manager search. The other finalists in the search were AEW Capital Management, Heitman and Adelante Capital Management. The pension fund will be coming back sometime in early 2006 to find another manager for the remaining $50 million. There is a chance this capital could be placed with a manager that has a global strategy. The pension fund will be looking at the other finalists on the search and bringing in some new candidates as well. Sacramento County seeks total returns in the 9% to 10% range for its REIT investment program.