COLUMBIA — South Carolina’s state pension managers see a chance for their $29 billion fund to profit from the real estate collapse that has affected much of the country.
The managers see commercial real estate as a good value, saying it could return double-digit profits for the state’s current and future retirees, The State newspaper of Columbia reported.
Using only a small portion of the pension fund to buy real estate minimizes the risk, they said.
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 home- owners, threatening money meant to pay for the retirements of tens of thousands of state workers.
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.
“You really can’t go wrong in the long run,” Chellis said, ‘”f you find those kinds of investments.”
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.
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.”
