January 31, 2018

Already a significant player in the real estate space, sovereign wealth funds (SWFs) are set to further increase their allocation to real estate.

Preferred sectors include core office and retail assets as well as open-ended funds and listed REITs (real estate investment trusts) with allocations to steadily increase over the foreseeable future.

SWF’s allocations to alternatives – which includes real estate and infrastructure – have increased significantly across most portfolios, according to Nick Wilson, from JLL’s Asia Pacific Capital Markets Research team, noting that drivers include low correlation to traditional asset classes, such as equities and fixed income, and the potential for high risk-adjusted returns

Based on Preqin data, 74 percent of global sovereign wealth funds now invest in at least one alternative asset class with real estate and infrastructure the most favoured asset class.

In an August 2017 report, the firm cited alternative assets such as real estate as long-term investments and hence “suitably aligned with sovereign wealth funds’ investment horizons.” These funds are also able to “afford the illiquidity associated with these types of investments,’ it said.

The shift towards direct investment

The report also noted that, while these funds have traditionally relied on external fund managers to help with real estate investments, many are beginning to lead their own direct deals in an effort to boost yields and cut costs.

The Government Pension Investment Fund of Japan (GPIF)—the world’s largest pool of retirement savings and a relatively new investor in alternative assets—may follow the same path.

In December last year, GPIF picked Mitsubishi UFJ Trust and Banking to manage its holdings in real estate. According to the Nikkei Asian Review, “the pension giant will adopt a ‘fund of funds’ strategy – managing funds that invest in other funds – for the first time.” GPIF is expected to invest up to five percent of its 156 trillion yen (US$1.37 trillion) holdings in alternative assets such as infrastructure projects, private equity and real estate.

Among the most recent investments in real estate by a sovereign wealth fund is Norway’s joint purchase, with Tokyu Fudosan Holdings, of five commercial buildings in Tokyo for around US$1.2 billion. Norges Bank Real Estate Management will pay 92.75 billion yen for its 70 percent interest in the assets while Tokyu Land will acquire the remaining 30 percent interest and manage the properties on behalf of the joint venture, according to a company statement. It is the fund’s first real estate investment in Asia.

While the fund has been active in Asia for some time, it has had difficulties finding suitable real estate assets that meet the strict investment criteria in which the fund operates, according to Wilson.

As sovereign wealth funds grow, it’s likely that their investment in real estate will rise steadily. According to PwC, sovereign investors held US$11.3 trillion in 2015, a figure that’s predicted to grow to US$15.3 trillion by 2020. In 2015, 59 percent of sovereign wealth funds invested in real estate. By 2017, this share has reached 63 percent.

Oil-funded funds dominate

By sources of capital, more than half of the world’s sovereign wealth funds are funded by hydrocarbon, according to Preqin. Hydrocarbon-funded sovereign wealth funds make up 53 percent of total industry capital, and include many of those in the oil-dependent Middle East such as Kuwait Investment Authority and Abu Dhabi Investment Authority.

The recent rise in oil prices to the highest in three years is expected to improve Mideast sovereign wealth funds’ cash allocation, said Fadi Moussalli from JLL’s International Capital team in Dubai. This is positive for economic outlook, as higher oil prices will help boost confidence and investment sentiment of Gulf based investors he says.

Middle Eastern investors have traditionally preferred to invest in the UK, notably in London, but allocations to Asian real estate are expected to rise as some of the region’s major SWFs make moves to balance their global exposure,” says Moussalli.

Click here to read more about cross-border real estate investment.


Fadi Moussalli

Capital Markets, JLL MENA

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