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July 27, 2017

Asian and Middle Eastern sovereign wealth funds (SWFs) and pension funds have continued to increase their real estate allocations and have led the charge in investment in new sub-sectors – notably in logistics.

According to JLL’s Global Capital Markets Research Director, David Green Morgan, “SWFs around the world have registered a significant uptick in real estate transactions over recent years, and have been at the forefront of expanding the institutional-grade market into new areas such as residential development, data centres, and logistics.”

Globally, 63 percent of SWFs have real estate allocation, a moderate increase from 62 percent in 2016 and 59 percent in 2015, according to the 2017 Preqin Sovereign Wealth Fund Review.

Among them, SWFs from Asia and the Middle East are leading the way in real estate allocations, as each region accounts for 27 percent of investors in global real estate investment, compared with North America’s 19 percent.

Pension funds and insurance companies together account for over half (51 percent) of total capital allocated to real estate by the so-called US$1 billion Club investors, based on a June report by Preqin. Asset managers and private sector pension funds each account for 15 percent of total capital allocated to the asset class by the Club.

Abu Dhabi Investment Authority, the third-largest sovereign wealth fund in the world, is the biggest investor in real estate. It has a current allocation to the asset class of US$50 billion, representing 6.3 percent of its US$792billion in AUM, according to the Preqin data.

“We see SWF’s coming together with other institutional investors such as pension and insurance funds to invest into companies and platforms that provide further opportunities to build scale and expand their real estate portfolios,” says Green-Morgan.

In the last year, Asian sovereign wealth funds and insurance funds have been actively buying real estate assets. Singapore’s Government Investment Corp. (GIC), for instance, acquired Europe’s P3 Logistic Parks for 2.4 billion euros in November last year. Ranked the tenth-largest sovereign investor globally with assets worth US$343 billion, GIC has increased its exposure to real estate, private equity, and other alternative asset classes in the last decade. Currently, seven percent of its portfolio is allocated to real estate, and GIC is aiming to boost it further to between nine and 13 percent.

In June, China Investment Corp. (CIC) agreed to buy Blackstone’s pan logistics company Logicor for 12.25 billion euros (US$13.82 billion), in the largest ever European real estate deal in terms of transaction value. CIC, which is the second-largest sovereign fund in the world with over US$814 billion in assets, has also been increasing its real estate allocation. As of July 2016, CIC has invested in 40 real estate assets across Asia, North America, Europe, and Oceania that led to a substantial inflow of $10.6 billion.

Meanwhile, Japan’s Government Pension Investment Fund—the biggest in the world with assets valued at US$1.25 trillion—is also pushing to expand its five percent allocation to real estate assets. GPIF in May this year asked asset managers around the world to submit proposals to run parts of the funds’ real estate portfolio. The fund plans to invest in core real estate and infrastructure funds on a global basis.

Middle Eastern SWFs are also upping their property investment in Asia Pacific, with the hospitality market as the primary area of focus. Among the Asia Pacific countries, Singapore is the most attractive target for Middle Eastern investors, while Hong Kong ranked second.

China’s insurance groups have also been actively acquiring real estate assets. China Life Insurance (Group) announced in May that it was buying 48 commercial properties in the United States with a total value of US$950 million from ElmTree Funds, a private-equity firm based in the city of St Louis.

When asked if there has been an increase in Chinese insurance and pension funds allocation, the JLL’s Green- Morgan commented, “Most certainly, but it is coming from a zero base. Even within China the allocation to real estate even just five years ago was very low, now with revised regulations, they can expand globally. Given the size of their AUM (asset under management), it will take many years for them to reach their desired allocations.”

Globally, real estate continues to attract significant amounts of capital from SWFs because the asset class’ low correlation with traditional investment including bonds and equities helps to minimise the risk in investment portfolios, says Green-Morgan.

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David Green-Morgan

Global Capital Markets Research Director, JLL

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