Q1 2013 Report - Real Estate

June 21, 2013 by Loch Adamson

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European real estate investments accounted for 43 percent ($3.6 billion) of sovereign wealth funds’ total international direct investments in the first quarter of 2013. This surge was mostly driven by a desire for safe inflation-linked assets such as high-status commercial properties and luxury hotels with secure rental incomes in gateway cities like London and Paris. In recent months Norway’s Government Pension Fund Global (GPFG) has led the way by seeking out high-end commercial properties, but the fund didn’t close any European real estate deals the first quarter, instead other sovereign wealth funds led the charge with the Kuwait Investment Authority’s St. Martins Property Corp., China’s State Administration of Foreign Exchange (SAFE) and the State Oil Fund of the Republic of Azerbaijan (SOFAZ) all finalizing substantial property acquisitions in this quarter.

SAFE’s purchase of 49 percent of One Angel Square, the headquarters of the Manchester, U.K.-based consumer services provider the Co-operative Group, is particularly noteworthy. Core property valuations are strong as many institutional investors, including sovereign wealth funds and state pension funds, seek to protect the value of their portfolios by investing in premium commercial real estate in developed markets. However, SAFE’s purchase represents a growing area of interest for several sovereign wealth funds: investments in slightly "off-core" assets such as commercial properties in major provincial cities, those that can be improved with a relatively small investment and warehouses.

Some sovereign wealth funds are investing heavily in luxury hotels. The Abu Dhabi Investment Authority (ADIA) and the Qatar Investment Authority (QIA) bought European hotel portfolios in the first quarter: ADIA in the U.K. and QIA in France. Although the hotel business is notoriously cyclical and often suffers from low margins and fluctuating occupancy rates, both funds have sought to harness the rising spending power of the emerging-market elite, who frequent such luxury hotels during business trips to Europe.

Sovereign wealth funds are also buying U.S. commercial real estate, despite the sector’s recent recovery. Their U.S. acquisitions followed the same trends as those in Europe. GPFG made its first-ever investment in U.S. real estate in Q1 2013, buying 49.9 percent of five prime office properties through a joint venture with New York–based financial services firm TIAA-CREF. The assets, located in Boston, New York and Washington, were valued at $1.2 billion.

Luxury hotels in the U.S. garnered some attention too. In the first quarter of 2013 Government of Singapore Investment Corp. (GIC) completed its purchase of MSR Resort Golf Course, a hotel portfolio previously owned by affiliates of New York–based hedge fund firm Paulson & Co. The hotels were originally held by troubled Morgan Stanley real estate funds, but Paulson & Co. put them into bankruptcy in February 2011.

As a major creditor, GIC initially put in a $1.5 billion bid for the five properties, but the hedge fund firm argued that the offer was too low because of the assets’ debt load. Paulson & Co. struggled to file a bankruptcy plan for MSR in 2011, during which time GIC accused the firm of manipulating the insolvency process for its own gain by waiting for a significant upswing in the commercial real estate market.

In August 2012 the sovereign wealth fund rebid for the hotel group, which includes the Arizona Biltmore Hotel in Phoenix, Arizona, the Claremont Hotel Club & Spa in Berkeley, California, the Grand Wailea Resort in Maui, Hawaii, and the La Quinta Resort & Club in La Quinta, California. The purchase was completed this March, when a U.S. court approved the settlement.

Sovereign wealth funds made few infrastructure investments. GIC, which was among the most active in this sector, favored power-generation. It co-invested with Highstar Capital when the New York–based infrastructure fund purchased the assets of Walnut Creek, California–based GWF Energy, a power plant operator running three natural-gas-fired plants in the state. GIC also bought a $200 million stake in Indian state-owned power generator NTPC on the open market in February when the government sold a tranche of shares.

Otherwise, sovereign wealth funds made infrastructure investments through asset managers. Azerbaijan’s Sofaz invested $50 million in the IFC Climate Catalyst Fund, an investment pool run by the World Bank Group’s International Finance Corp. that is designed to stimulate the development of funds and projects focused on renewable energy and climate-friendly solutions. The Alaska Permanent Fund also increased its infrastructure allocation by committing to Swedish private equity firm EQT’s second infrastructure fund, which focuses on opportunities in Europe.

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