California Pension Fund’s European Investment Shows Promising Industry Growth for American Real Estate Investors

Small real estate investors, landlords, and property flippers are uniquely positioned to benefit from big investment firms’ growing hunger for real estate. The market is seeing less risk in asset-backed hard money loans and more value in real estate development, as evidenced by recent moves at some of the world’s largest pension funds. This is great news for real estate developers and investors, who are likely to see a higher return on investment and easier credit as more demand for real estate investment raises the tide for the entire industry.

This trend to buy real estate is behind the $293 million investment that CalSTRS is making on European real estate. Betting that Europe’s financial woes are soon to be in the rear-view mirror, the California pension fund has invested in two funds that will purchase real estate throughout Western and Northern European countries, sending a strong signal that real estate markets are continuing to grow and are increasingly seen as a smart investment.

CalSTRS, also known as the California State Teachers’ Retirement System, is the eighth largest public pension fund in the world and is the largest teachers’ retirement fund in the U.S. While the fund has already made large bets in stocks, bonds, and paper assets, the firm has turned to real estate for a stronger return and higher preservation of capital.

This has driven the fund’s asset managers to place $200 million in TCI Fund Management’s Real Estate Partners Fund I and $93 million in Meyer Bergman’s European Retail Partners fund. Both European-based asset managers will use the funds to invest in real estate opportunities throughout the continent.

Good for Europe, Great for American Investors

TCI’s fund focuses on so-called trophy assets, mainly high-value commercial and residential properties throughout Western Europe. However, Meyer Bergman’s fund focuses on lower-level, high-value retail property, particularly in Germany, France, Nordic countries, and the UK.

This is good for European real estate owners now, but it’s the beginning of a trend that is set to return to the United States in the short term. Meyer Bergman’s fund operates by finding opportunities in recently renovated and added-value real estate that is currently held by small investors, house flippers, and landlords. They then invest in those properties.

Although CalSTRS has gone far from home to find valuable real estate investments, many economists expect more aggressive investments in American real estate in 2015. The reasons for this are simple: America’s economy is growing more quickly, unemployment is plummeting, and interest rates are still falling. This is a perfect storm for real estate development, because it means cheap credit, high demand, and high returns. When the small investors prove there is low-risk profit to be made in real estate, larger investors will come in and bid high for properties that have already been renovated and improved upon. That makes the present a crucial time for property flippers to jump on available opportunities as quickly as they can.

Real Estate’s Big Risk-Adjusted IRR

Part of the move for CalSTRS was driven by a need for income as yields continue to fall on bonds throughout the United States. While long-term U.S. Treasuries have given less than a 2.5% return and municipal bonds are returning less than 6%, the CalSTRS target is for a 7.5% return.

While the fund has met that target over the last 20 years, recent losses in stocks and alternative investments have caused a shortfall that the fund admits it has not fully recovered from. Noting that it will need “above a 10 percent investment return each year for the next 30 years” to be fully funded, CalSTRS has concluded that “reliance on the market is not a viable alternative,” forcing it to look elsewhere for yield. Thus its big bets on the real estate market.

And the move to real estate is well timed and well advised. After years of struggling performance, real estate prices posted solid gains in 2014 in the United States. In Europe, the price gains were much lower for most countries, but a recovery is clearly at hand. Even Spain, once the poster-child of real estate dysfunction, saw a 0.8% rise in real estate prices.

The move into real estate provides diversification for CalSTRS, both in terms of asset class and geography. The pension system still has most of its holdings in local assets, so the move into Europe will help it diversify at a time when European assets remain cheap but are set to rise. The move into real estate also provides much-needed income at a time when income is very hard to find. And at a projected 6%-8% IRR on their investment, CalSTRS is likely to get a solid cash stream on its European holdings that it can compound by investing in other opportunities as they arise. At the same time, the struggling but recovering European real estate markets get a cash injection that they can use to stimulate demand. It’s a win-win for all involved.

The Future Demand for Real Estate Investments

CalSTRS is not the only pension fund facing a shortfall, and it isn’t the only institutional investor frustrated with the stock and bond markets. More and more professional investors are finding it hard to get a sustainable income stream above the meager rates of government bonds. At the same time, more retirees are putting a strain on those pension funds and creating a greater need for income. To both of these problems, investing in real estate is the clear answer.

With this in mind, CalSTRS is probably setting a trend here, and we can expect both them and other pension funds to look for more real estate holdings in the future. This is great news for the industry, which has faced risk-averse investors since 2008. It’s also great news for the economy, as we will finally have the capital injection we need to build new homes, new stores, and create new jobs.

This means there is a growing need for entrepreneurs and investors to invest in the real estate that will be needed in the future. If you’ve been considering a foray into the real estate market, now’s the time. Looking to buy REO or short-sale property? An equity-based, private hard money loan can help you get your project off the ground now, so that they can become part of the next round of real estate purchases from pension funds like CalSTRS.

Hard Money Loans Let You Take Advantage of New Opportunities

Unlike with a conventional loan, Socotra Capital can provide you with a hard money loan within 10 days, allowing you to take advantage of exciting investment opportunities as they arise. Even if you have a low credit score, approval is still within your reach, as our underwriting guidelines are focused on equity – not on borrower credit. Our Fix and Flip loan program is uniquely suited to investors looking to rehab and sell property. With our Fix and Flip private money loans, you can receive up to 75% of the project cost, making it a perfect match for investors who seek to buy properties that require an all cash investment. With a program like this, there’s no reason for you to hesitate on your next investment opportunity in the rapidly growing real estate industry.

Your real estate assets are your best investments for the future. At Socotra Capital, we’re proud to be the premier direct hard money lender for California real estate. Contact us today to learn more about how we can help.