Even the country’s richest school is affected by the real estate slump. And it needs to take extra care when it comes to real estate investments – like canceling a deal with China’s sovereign when its wealth fund collapsed.

As real estate values fall, Harvard University’s property in investments missed the benchmark in year ending June 30. Even so, the school has been trying to reach benchmarks for real assets – this includes property, commodities, and natural resources (like timberland) – and one method of doing this is through pursuing real estate stake sales. According to a source that refused to be unnamed, Harvard was in talks with China Investment Corporation.

China Investment Corporation, which manages a fraction of the nation’s foreign exchange reserves through a $300 billion fund, discussed sale of several million dollars in holding with Harvard. The talks, which have not been made public, died down when China Investment Corporation’s wealth fund collapsed. Both Harvard spokesperson and CIC spokeswoman in Beijing refused to comment.

When Jane Medillo, 51, took over in July 2008 as chief executive officer at Harvard Management Co. in Boston the Harvard endowment rose 11% to $27.4 billion in the past month. She has achieved making funds more liquid through cutting by 20% the ranks of outside managers plus reducing by 50% private-equity and real estate commitments.

The university’s investments plunged by 27% in the last year because of losses in real estate. Though institutional funds – which include public and corporate pensions, endowments, and foundations – returned a median of 13%, real assets – including property, commodities, and natural resources – were down by 2.7%. Real assets, with its 38% loss, is tagged the worst-performer two years running.

Daniel Cummings, who became the managing director of real estate group in April 2009, had made a number of investments that are not within the traditional limited-partnership fund structure. In the coming year, the endowment will start devoting money in investments that have already been proven to yield good results, such as natural resources and fixed-income trading. Property holdings are also being restructured.