A lot of the public assumes that the worst thing that can happen to an investment is that it can become worthless. This is one reason the extreme write downs of the portfolios of certain financial institutions strike them as almost looney, creating sympathy for the idea that mark to market accounting rules are making mischief on balance sheets. After all, real estate investments aren’t really going to zero, right?
Wrong. The financial professionals who run California’s giant pension fund, Calpers, have recently disclosed that their real estate portfolio is worth less than zero. Because of leverage used to build Calpers into one of the largest land owners in the country, Calpers is expecting a 103% loss on its real estate portfolio.
The Wall Street Journal explains:
Calpers in recent weeks said it expects to report paper losses of 103% on its housing investments in the fiscal year ended June 30. That’s because Calpers invested not only its own money, but billions of dollars of borrowed money that must be repaid even if the investment fails. In some deals, as much as 80% of the money invested by Calpers was borrowed.
In the latest wrinkle: To generate sorely needed cash, a troubled Calpers venture known as LandSource recently started the process of selling land during the worst property market in a generation. Calpers could potentially lose nearly $1 billion on LandSource, a $2.5 billion deal completed early last year, and one of the priciest U.S. residential-land transactions ever. LandSource is now under bankruptcy-court protection.
With $239 billion in assets as of June, Calpers’s portfolio was bigger than the government-run funds of Russia, South Korea, Dubai and Chile combined. In recent years, Calpers became much more aggressive than other pension funds in making nontraditional investments — real estate, foreign stocks, even forestland.
Sounds horrible, right? But don’t worry. Calpers has the following reassuring things to say.
- It owns a lot of commercial properties, and those haven’t been as hard hit as residential investments. Cue spooky music indicating next attack by horror movie monster now.
- It’s a long term investor and surely the real estate market will bounce back at some point. Right? Right? Any day now.
- “No one in the marketplace knew how swiftly the housing market would fall — not the Federal Reserve, not the Treasury,” said Ted Eliopoulos, head of Calpers’s real-estate portfolio. See? It’s not their fault.