The US’s second largest PPF, the US$287 billion California State Teachers’ Retirement System (CalSTRS), is ramping up its exposure to the US real estate through its model of fostering co-investment platforms.

This week has seen CalSTRS boost its property investments with a US$1 billion joint venture deal with Pacific Coast Capital Partners (PCCP) to invest in the single-family housing sector. The venture will focus on build-to-rent communities across the nation. Both partners have so far paid US$240 million for five BTR properties in Georgia, Florida, Tennessee, and North Carolina.

Further allocations to real estate are expected in 2021. CalSTRS is targeting a long-term real estate allocation of 14% of AUM to improve diversification and exploit the risk-return profile of private markets. However, market volatility has kept the real estate portfolio below its objective and by last month its allocation was just 12.7% with assets totalling US$36.3 billion. The fund is aiming to achieve its target by reducing public equities to 49% of AUM – in February, allocation to the asset class was a shade under 51%. It is using partnerships with real estate investment managers to achieve its targets. Potentially more than US$2 billion in real estate acquisitions is needed to meet targets.

CalSTRS’s collaborative model of real estate investment looks to owning asset managers as well as co-investments. In recent years, it has sought direct control over real estate investment decision-making, which has involved recruiting and building talent for its own in-house team. The bolstering and empowering of its real estate team has yielded positive results. In FY2019/20 (to end-June), its real estate portfolio earned a 6.4% annual return just as the pandemic rocked the economy, beating its benchmark return by 2.5 percentage points. This compared to an overall return of 3.9% - just 0.2 percentage points above benchmark.

CalSTRS' real estate investments totaled US$1.8 billion in 2020, which were concentrated later in the year, according to its latest real estate semi-annual report. The fund invested a further US$650 million into the BCal II office real estate joint venture with Beacon Capital Partners; the JV is 95% owned by CalSTRS.

CalSTRS forged a new deal with Hearthstone – Cal Hearthstone Debt JV – that will provide finance for residential housing, with the PPF stumping up US$300 million. It also committed an additional US$250 million to Fairfield AHF, having acquired a majority interest in Fairfield Residential in 2019, as well as a US$250 million to a real estate debt joint venture with 3650 REIT. In H120, the fund invested US$125 million to Waterton Residential Property Venture XIV, a US value-added multifamily property fund, and another US$100 million to CrossHarbor Strategic Debt Fund, an open-end fund managed by CrossHarbor Capital Partners.

Related funds CalSTRS