The Ohio State Teachers Retirement System plans to make four to five investments in real estate investment vehicles for its international and opportunistic portfolios in fiscal 2025, according to its fiscal 2025 investment plan released in June.
The pension fund, which has $94.5 billion in assets under management, aims to invest in “niche products” in key markets, targeting property types such as data centers, medical offices and industrial properties in gateway markets and infill areas.
STRS Ohio did not respond to a request for comment, but board documents state:
“We target managers who have been able to weather real estate cycles well and have strong sourcing networks to identify assets that are mispriced in traditionally liquid markets.”
As of April, real estate was below STRS Ohio's 10% target neutral allocation, and the pension expects it to remain below 10% in fiscal 2025. The pension projects asset class returns over this period to be below its 5.1% target but predicts a return of at least 2%, up from a -1.5% return last year, when real estate was the worst-performing asset class.
Direct holdings in the apartment, retail, office and industrial sectors make up 67% of the pension fund's real estate portfolio, with real estate funds and listed REITs making up the rest. The pension fund expects a “moderate pace of acquisitions” in its direct real estate portfolio in the first half of fiscal 2025, but sees a recovery in the second half. It aims to focus new direct investments on apartment, retail and industrial assets and reduce its exposure to offices.
“Regionally, we plan to reduce the weighting of the Midwest and the East. [US] “We will continue to prioritize our Southern and Western regions through selective dispositions and acquisitions,” STRS Ohio said. “New investments will include both stable core properties and new developments that can take advantage of market opportunities.”
Most of the pension fund's real estate investments are in overseas markets, where it expects its holdings to generate returns of 2% to 6% in fiscal 2025.
In Europe, deal activity is expected to remain subdued in 2024, but according to STRS Ohio, executives expect transactions to increase in fiscal 2025 as distress emerges and owners need liquidity. STRS identified industrial and residential assets as the most promising in Europe, but noted that caps on rent increases are a challenge for the multifamily rental market.
The pension fund sees fewer opportunities in developed Asian markets next year, particularly in Japan where the Bank of Japan has signaled gradual interest rate hikes. However, STRS Ohio sees opportunities in Japanese and Korean hotels, logistics and retail, as well as Korea, where favorable pricing is available as large companies look to sell real estate assets and “consolidate” their balance sheets.
Regarding the outlook for public real estate, the pension system said REITs will “benefit from a confluence of factors,” including lower private real estate prices and limited supply. It expects REIT returns to range from 4 percent to 18 percent next fiscal year, with a median return of 11 percent.
“The upper end of the return range will be achieved if inflation and market interest rates normalize, the Federal Reserve initiates a rate cutting cycle, and bank liquidity and lending standards continue to improve,” the investor said.