In the midst of the recent global financial crisis, investors fled the faltering economies of Spain and Portugal, leaving real estate available at fire-sale prices.
In stepped the Alaska Permanent Fund Corp. On the hunt outside the competitive U.S. market, the fund last year bought its first overseas properties. Among them were two shopping malls: one in the Mediterranean port city of Alicante, Spain, and the other outside the Portuguese capital of Lisbon.
Many Alaskans may not realize that the money behind their annual dividend checks comes from an array of investments. Among them are stocks, bonds and 52 pieces of real estate from Hawaii to New York City, and now Europe.
There's an apartment complex in Denver, a warehouse in Redlands, California, an office tower on New York's Park Avenue and a shopping mall on Maui. All are part of the Permanent Fund's $6 billion real estate portfolio, which makes up about 12 percent of the fund's $54 billion value.
The fund has accumulated the properties over a three-decade span, starting in 1983 when the Legislature agreed to let it branch out from domestic bonds, with their safe, but lower returns, into stocks and real estate.
At first, the fund could only partner with large national real estate investors, but over the years a series of legislative changes allowed the fund to take full ownership in its properties.
Steve Cowper, who was chairman of the corporation's board of directors in the mid-1980s, said the lack of investment experience in the state was the reason for the cautious approach.
"We had advisers who knew the areas and we were smart enough to know that we didn't know anything," Cowper said. "We didn't want to get beyond our headlights."
A major advantage to full or majority ownership, said Mike Burns, the fund's executive director, is the ability to control key decisions related to buying, selling and management of property.
The fund's European property purchases are the latest in its ever-bolder approach to real estate investment.
After hiring two managers to vet property in Europe, the fund in July 2014 bought a mall in England for $226 million.
The Golden Square Shopping Centre in Warrington is home to well-known retailers like Swarovski, H&M and Topshop. The borough of about 200,000 may not have the cachet of London, 200 miles to the southeast, but property there is also much more affordable.
"The U.K. tends to be the first port of call for so many international investors coming to Europe before moving on to other countries," said Roger Cooke, Madrid-based senior adviser for real estate corporate finance at accounting and advisory firm EY. "The market is transparent, they have confidence in the legal and justice system and there's a large number of players so the market is liquid."
A few months later the fund bought half ownerships in the Zenia Boulevard mall in Spain and the Alegro Alfragide mall in Portugal for a total of $340 million. Its partner is Immochan, a French mall designer and manager.
Burns is bullish about the Spain and Portugal properties. Real estate in those countries is still a deal in comparison with the faster-recovering U.S. market.
But there is some risk. Among those worst hit by the global financial crisis, the economies of Spain and Portugal are barely out of sleep mode and remain saddled with high unemployment rates (23 percent in Spain and 13.5 percent in Portugal).
"You run toward the fire and go for the bargains," said Burns, formerly the president and CEO at KeyBank of Alaska. "These are good operators in good locations with a proven product and good access to public transportation. People are still going to shop and eat."
The fund seems to be in rarefied company. Microsoft co-founder Bill Gates, business magnate Carlos Slim and storied investor Warren Buffett recently bet on Spain's real estate market. (The three topped the Forbes "Richest People" list this year at number one, two and three respectively.) Wealthy Chinese investors, meanwhile, are sending capital into Portugal's property market.
Cooke believes Spain's real estate market has "bottomed out" and is on the upswing, although shopping malls may take a bit longer to recover.
"Retail sales have been badly hit and people have to be really confident before demand increases to push shopping mall rents up, but we are beginning to see positive figures," he said.
Permanent Fund properties span the country
In the three decades since it bought its first property, the Permanent Fund Corp. has amassed more than four dozen others across the U.S., from Manhattan to Maui.
About one-third are in Texas. Burns said that while "there are a lot of dots on the map there," the fund's Texas properties amount to only about 10 percent of the value of its directly held real estate.
"We go where the markets are attractive, and Texas is a fast-growing, reasonably priced market, so we want to be there," Burns said. "Regional diversification is important but it doesn't drive the whole decision."
Before the purchases in Europe last year, perhaps the most exotic locations for properties were shopping malls in Hawaii, including the largest mall complex on Kauai.
Last year the Kukui Grove Center brought in the island's first Pier 1 Imports, Sports Authority and Ross Dress for Less stores. They opened to the same giddy reception that meets new national brands in Alaska.
"It was a big deal when Ross opened here last year," said Bill Buley, editor in chief at The Garden Island newspaper. "There was a big line to get in."
The property portfolio also includes investments called equity real estate investment trusts. They allow investors to trade small slices of multiple properties quickly, like stocks in a mutual fund, as opposed to, say, going through all the marketing and paperwork necessary to sell an office building. Money is made or lost based on rental returns or property sales.
Since 1995, real estate has returned an average of 10.39 percent. To figure out whether it's on track, the fund measures the performance of its real estate portfolio against a combination of global investment indices known as a benchmark. It's similar to an individual investor comparing stock performance against the S&P 500. In the last two decades, the Alaska Permanent Fund Corp.'s real estate portfolio has outperformed its benchmark on average by less than one percent.
Burns said the Permanent Fund's recent European real estate deals gained it geographic variety, which could protect it, to an extent, from any swings and stagnation in domestic real estate. Europe also offers the potential for bigger payoffs than today's safer, but also less lucrative U.S. market can provide.
Its swankiest address is perhaps 299 Park Avenue in Manhattan, directly across the street from the Waldorf Astoria Hotel and connected by underground walkway to Grand Central Terminal. The Permanent Fund Corp. shares ownership of the glass-encased office tower with Fisher Brothers, a century-old family real estate company variously described as "dynastic" and "royal," whose headquarters are in the building.
With the exception of Goldbelt Place, the Juneau building owned and occupied by APFC, none of its properties display flags, plaques or any obvious nod to Alaska.
The Tyson's Corner Center in the affluent and growing suburbs of Northern Virginia just outside Washington, D.C., almost installed a fountain made of Alaska marble, but ultimately deemed the project too expensive.
Tyson's Corner, where shoppers can pick up $8 bars of soap or $100 yoga pants, is well-known among Alaskans compared to the fund's other properties, perhaps because it was the first property purchased.
"We've owned Tyson's so long that people in Alaska are fairly familiar with it and identify with this asset more than any other," Burns said. "When I go back for meetings, the retailers say that sometimes people from Alaska show up and say, 'I'm from Alaska. Do I get a discount?' "
Given the steep drop in oil prices in the last year, Burns wants to make it clear: "There is no Alaska discount. Especially now."
Alaska Dispatch Publishing