2014 H1 - Real Estate and Infrastructure

October 28, 2014

  • Print
  • Please login
For the past half decade, sovereign wealth funds have hungered for real estate. Allocations to the asset class rose sevenfold as funds scoured the world for high-quality properties. In 2010 they sank $2.7 billion, some 8 percent of their foreign direct expenditures, into real estate abroad. By 2013 that total had climbed to $21 billion, or 55 percent 

But the boom appears to be ending — or, at least, the composition of sovereign funds’ property purchases is changing. In the first six months of 2014, they bought properties abroad worth a combined $5.9 billion, or just 25 percent of their total foreign direct investment.

Sovereign wealth funds are buying less real estate because they face stiffer competition for so-called core properties — office buildings with secure rental incomes in major cities — which have long formed the mainstay of their real estate portfolios. Over the past year pension funds and insurance companies, which have long-term investment horizons but short-term liquidity requirements, have increasingly looked to prime commercial real estate to replace the revenue they once reaped from bonds before the financial crisis.

Rival institutions’ growing appetite has pushed up prices for core real estate assets and driven down yields, making them less attractive to sovereign wealth funds. As a result, in the first half of 2014 core properties only accounted for 43 percent ($2.6 billion) of sovereign funds’ total foreign real estate purchases, compared with 76 percent ($8 billion) in the previous six months andq 51 percent ($10.6 billion) for 2013.

Hanging on to the Core

That said, some sovereign wealth funds are still finding deals in major cities, particularly in the U.K. and the U.S. For example, in January multinational media giant Time Warner closed the sale of the 1.1 million square feet of office space it owned in its New York headquarter towers, Time Warner Center, for $1.3 billion to the Abu Dhabi Investment Authority (ADIA) and Singapore’s GIC, through a venture managed by Related Cos., a New York–based property developer. ADIA and GIC each invested about $300 million, with the balance raised through commercial-mortgage pass-through certificates.

London also still seems to lure state-owned investors as they look to buy prime properties. Through its Gingko Tree Investment arm, China’s State Administration of Foreign Exchange (SAFE) picked over the city’s crowded commercial real estate market, teaming up in April with New York’s Tishman Speyer Properties and a third party, whose identity was not disclosed, to buy the headquarters of supermarket chain J Sainsbury for about £310 million ($522 million), according to sources. The property, which was sold by Union Investment, a Frankfurt-based asset manager, will probably generate steady income because it is fully leased to Sainsbury’s until 2026.

Hotels Cooling Off?

Last year the ADIA and the Qatar Investment Authority (QIA) focused on the hotel industry, which had long suffered from a lack of investment and, in their view, promised attractive returns. The two funds poured $3.6 billion into the luxury hotel sector, seeking reliable revenue from business travelers, a growing number of whom come from emerging markets.

But this acquisition pace slowed as other investors moved in. In the first half of 2014, ADIA and QIA made just two major hospitality sector deals each. ADIA bought the London EDITION hotel in Mayfair from Bethesda, Maryland–based Marriott International. This purchase is the first in a three-deal agreement, reached in August 2013, that will see the Abu Dhabi fund acquire two other EDITION hotels, in Miami and New York, as construction is completed. The Emirati fund also bought 11 Marriott and two Hilton-branded hotels in the U.S. from Raleigh, North Carolina–based Concord Hospitality Enterprises for $240 million.

QIA built on its relationship with Denham, U.K.–based InterContinental Hotels Group, purchasing an 80 percent stake of the InterContinental New York Barclay hotel and agreeing to refurbish the property through a joint venture with the company. Through its Katara Hospitality unit, which owns and operates hotels, QIA also bought a 50 percent stake in five European InterContinental hotels, in Amsterdam, Cannes, Frankfurt, Madrid and Rome.

Residential Prospects

The first half of 2014 was notable for sovereign wealth funds’ foray into residential properties. Historically, this has not been an attractive sector for sovereign funds, which prefer the greater certainty of the commercial market. But as the funds sought overlooked property categories, residential developments — particularly student accommodations — drew their attention.

Sovereign wealth funds finalized four deals in this sector in the first six months of 2014. ADIA invested £200 million ($333 million) in London-based Fizzy Living, a subsidiary of Thames Valley Housing that builds and leases new semiserviced apartments in London and southeast England specifically for young professionals. GIC formed a joint venture with Sydney-based Macquarie Capital to buy a majority stake in Iglu, a student accommodation provider headquartered in London. And SAFE’s Gingko Tree committed a further £80 million in equity to UPP Group Holdings, a London-based student housing company in which it owns a 40 percent stake.

Sovereign Wealth Fund Infrastructure and Real Estate Investments by Region

But the most adventurous sovereign deal in residential real estate came from an unexpected quarter. In April, Malaysia’s sovereign wealth fund, Khazanah Nasional, announced that it had bought 8 percent of Manila-based 8990 Holdings, a leading developer of low-income housing in the Philippines, for 2.6 billion Philippine pesos ($66 million).

Cashing in on the Consumer

High prices have driven many sovereign wealth funds to seek out the sort of real estate opportunities that they once avoided. In the past two years, funds have looked to profit from rising consumer spending. That has prompted investments in shopping malls, often in emerging markets, and logistics facilities that ship goods to growing numbers of online shoppers.

This trend has continued in 2014. ADIA backed the development of the new Mall of Switzerland in Lucerne. Norges Bank Investment Management (NBIM), which oversees the Norwegian sovereign wealth fund’s roughly $850 billion portfolio, will invest more than $8.5 billion in real estate each year through 2016. NBIM committed about $450 million to a U.S. logistics property portfolio managed by San Francisco–based Prologis. Singapore’s Temasek Holdings invested in Chinese logistics warehouse developer Shanghai Yupei Group Co. alongside a regular partner, RRJ Capital, the Hong Kong–based private equity firm whose co-CEO is former Temasek chief investment officer Charles Ong.

Infrastructure for the Long Term

Many sovereign wealth funds are trying to allocate more to infrastructure because the returns on such assets align with their long-term investment horizons. But this year, as in 2013, state-owned funds have struggled to find the right deals and faced strong competition when they did.

Sovereign wealth funds completed few new major infrastructure deals in the first half of 2014. The highly publicized auction of Australia’s Queensland Motorways, in which four sovereign-fund-backed consortia competed, didn’t close until the second half, on July 2. The winning investor group, led by Melbourne-based toll road operator Transurban Group and backed by ADIA, paid A$7.05 billion ($6.6 billion) for the company, which manages a 70-kilometer (44-mile) network of tolled roads, bridges and infrastructure around Brisbane.

The largest completed infrastructure deal in which sovereign wealth funds invested during the first half was a €2 billion ($2.8 billion) fundraising by Wessal Capital, a firm backed by the Moroccan government and funds from Kuwait, Qatar, Saudi Arabia and the United Arab Emirates, to develop tourism infrastructure in Morocco. The new money will allow Rabat, Morocco–based Wessal to build hotels and a cruise ship port and marina in Casablanca, and to renovate the city’s old medina. It will also fund the development of new tourism facilities in Rabat, the North African nation’s capital.


Updated Fund Profiles

Our market-leading fund profile library provides unrivalled analysis of more than 90 government and sovereign funds.

Register to read fund profiles

Recent SWF Investments

Search the database of direct investments and mandates by fund, industry and target market to identify past deals that match your requirements. Access over $1 trillion worth of transactions dating back to the 1960s.

Register to explore our data

Latest SWF News

Sovereign Wealth Center makes staying abreast of the most recent government and sovereign fund events easy. Our team undertakes a thorough review of global news feeds every morning and distills salient points.

Register for the latest SWF news
Join the discussion:

To be able to print this content,
you must be a subscriber

For details on your subscription options,
please contact: