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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