State pension fund to buy SC real estate., the new money is here

South Carolina’s state pension managers see a chance for that $29 billion fund to profit from the real estate collapse that has affected much of the country.

Armed with their new ability to invest in real estate, the pension managers see commercial real estate as a good value, saying it could return double-digit profits for the state’s current and future retirees.

Using only a small portion of the pension fund to buy real estate minimizes the risk, they say.

But critics worry the commercial real estate market — including office buildings, malls and shopping centers — could suffer the same drop in prices that has hit homeowners, threatening money meant to pay for the retirements of tens of thousands of state workers.

Is the state smartly buying low — or is South Carolina hitching its fate to investments that have lost value and could lose more?

MEASURING RISK

Those responsible for the state’s pension system say there are bargains to be had in a down economy.

A volatile market — hurt by bad loans, tight credit, high energy prices and inflation — has decreased the price of most securities. As a result, the value of the state’s pension system, which holds primarily stocks and bonds, now is worth less than it was last quarter.

In expanding its investments into real estate, “we’re making sure we’ve done all the right things to shore up our decision-making process,” said State Treasurer Converse Chellis.

He says the state has purchased mortgage-backed commercial real estate securities for only a fraction of what those investments are worth. The goal, Chellis said, is to buy low and sell high, paying 20 cents on the dollar for securities and, later, selling them for 40 cents or 60 cents on the dollar.

Robert Borden, chief investment officer of the South Carolina Retirement Systems Investment Commission, said because real estate has lost so much value in the past two years, now is the time to buy.

The panel has invested about 1 percent of the state’s $29 billion in pension money in real estate.

Borden said the investment panel has hired two firms to advise it.

Even assuming foreclosure rates of 30 percent or losing half the value of the collateral behind its real estate securities, Borden said, analysis shows the state should make money on its real estate investments, up to double-digit returns.

But critics, such as New York University economist Nouriel Roubini, think the worst is yet to come for the real estate market.

“There are plenty of new residential ghost towns in the West in places like Nevada, California, Arizona,” Roubini wrote in the RGE Monitor in November. “Why would anyone want to build new shopping strips/malls, hotels and offices in such ghost towns?”

University of South Carolina Moore School of Business professor William Harrison Jr. says commercial real estate values have suffered “mild to moderate fallout” in the real estate collapse.

Whether the state’s decision to invest in commercial real estate was wise depends on the price it paid, he added.

Harrison frequently advises real estate developers and said most have reported banks clamping down on loans. With fewer loans available, Harrison said, prices are likely to fall.

But, for an investor, the reward often justifies the risk, he said.

“It’s not like they don’t know what’s going on out there,” Harrison said. “If I got the right price, I might go out and buy residential mortgage-backed securities.”

LOOKING FOR A BIGGER BANG

Moving into real estate is only the latest change that South Carolina has made in how it invests pension fund money.

The theory, the Retirement Systems’ Borden said, is that by diversifying the types of investments it has, the fund reduces its overall risk.

After pension plan funds for decades had been invested solely in low-risk, low-return bonds, voters in 1996 approved allowing the pension plan to buy stocks. In 2006, voters approved allowing it to buy foreign stocks, real estate and other private equity options.

Voters will decide this fall whether to allow local government pension plans the same investment options.

The retirement system has 400,000 current and future retirees. They include state and local government workers, university employees and teachers.

Since plan officials acquired more investment options, the state’s total return on its investments has risen to the 78th percentile from the sixth among 121 large pension funds, according to the retirement system. That means South Carolina is doing better than 78 percent of pension funds.
The pension fund also has raised its projected profits to 8 percent a year, expectations Gov. Mark Sanford has said are too optimistic. According to the pension fund’s most recent quarterly report available, the value of its investments is down 4.16 percent this year.

The state previously has struggled with the timing of its investments. For instance, it increased its stock holdings just after the late 1990s bull market peaked.

But Harrison said the reward on real estate investments often justifies the higher risk. He noted the New York-based Morgan Stanley investment bank made billions during the last recession buying cut-rate real estate.

"If the State of South Carolina is smart enough to invest in it's own real estate it will only be a matter of time before other investors will be following this investment plan" says local real estate agents. Top market investors have been waiting for "new money" to start the real estate recovery process and it looks like it' here.