By Muskan Arora
The $94 billion State Teachers Retirement System of Ohio
will focus on direct investments in apartments and industrial sector within its
real estate sleeve, as per its 2025 strategy.
Ohio STRS will continue to maintain international and
private fund pacing, alongside maintaining an overweight in REIT allocation,
according to a presentation by Jacob Clark, director of real estate investments
at the system.
The system invests in four major property types including
apartment, retail, industrial and office within its direct real estate sleeve.
These sectors have been heavily impacted due to continued
repricing from interest rates in fiscal year 2023.
The real estate portfolio returned -9.22%, 3.68% and 3.70%
for 1, 3, 5 years against a benchmark of -4.46, 4% and 4.16%, as of March 2024.
“Despite fundamental slowing due to higher rates of new construction,
the long term still holds promise for apartments due to the shortage of quality
rental housing,” said Clark, in the recent meeting.
The system allocates 66.7% to direct real estate investments
and 16.4% to REITs, as of March 2024.
“Retail properties experienced solid demand as retailers
realigned sales strategies and new construction remains limited. The online
shopping trend has slowed backwards, pre pandemic trend, and the lack of new
retail construction provides for some optimism for retail industrial flow due
to both slower demand and increased supply,” he added.
While the system has reduced office allocation significantly
over the years, and increased its allocation to retail and industrial sectors,
office remains overweight with apartments being underweight as compared to its
benchmark for fiscal year 2024.
“Fiscal year 2024 has been limited due to an unsettled
market with limited transaction activities,” said Clark.
“Office utilization has stagnated but is back to pre-covid
levels in markets like New York, from Tuesday to Thursday, leasing activity has
increased considerably in most of the major markets. Investor activity is also
starting to increase,” he further added.
In fiscal year 2024, the system purchased real estate funds
worth $208 million and direct real estate funds worth $168 million and sold
internal and external RE funds alongside REITS totaling up to $381 million.
“While Europe is still experiencing a low growth environment,
Japan continues to benefit from very low interest rates,” added Clark.
Moving forward Clark anticipates the asset class to be
“at-to-below 5.10% long-term expected policy return” and continue being
underweight the target allocation at 10%.
Ohio STRS has the most direct real estate investments in
eastern region of the US of 36% and 32% in the western region of the country.
“Long term, we will also seek to adjust regional portfolio allocations as opportunities arise. We expect to maintain the reallocation above 15% to capture the public pricing discount compared to private real estate values,” added the RE director.
