SWFs Continue Global Hunt for Properties of Varied Stripes

April 28, 2015 by Loch Adamson

Sovereign #Wealth Fund #RealEstate Trends
SWFs' #RealEstate Investments at a Turning Point
Will SWFs' Global Hunt for #Properties Continue?
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Sovereign wealth funds are at a turning point in the real estate markets. Is it time to adjust their strategies or just cash out?

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Sovereign wealth and public pension funds grabbed a series of headlines in 2014 as they bought up expensive properties in developed markets. Prime office properties in so-called gateway cities like London, New York and Paris attracted the lion's share of sovereign funds' capital, accounting for $13.8 billion of the $23 billion they spent on global real estate, according to Sovereign Wealth Center data. Of the major business centers, funds favored London, which received $4 billion in investments in 2014. In the U.S., however, sovereign funds looked beyond New York, the traditional favorite, and targeted other major cities including Boston, Los Angeles, San Francisco and Washington, D.C. In the U.S. capital alone sovereign wealth funds bought four office buildings for a total of $733 million.

One of the biggest real estate stories of 2014 involved Norges Bank Investment Management (NBIM), the arm of the central bank that oversees the world's largest sovereign fund, Norway's $880 billion Government Pension Fund Global. NBIM announced that it would allocate 1 percent of its total assets - over $8.5 billion per annum - to core real estate in developed markets between 2014 and 2016. NBIM fell short of its mark in 2014, deploying only $5.4 billion, as more competition for prime commercial assets, often from Asian pension funds and insurers, drove yields down and prices up.

Risking Up

Last year marked a turning point for sovereign wealth funds investments in other asset classes. Known largely as conservative investors, they started to embrace riskier strategies, including direct investments in privately owned technology and biotech companies. This developing trend had major repercussions in real estate too. Funds allocated more of their capital to logistics properties, for instance, as the boom in online shopping drove demand for delivery hubs in developed and emerging markets alike. Among the most active funds in this subsector were the $589 billion Abu Dhabi Investment Authority (ADIA) and Norway's GPFG. The two funds formed separate partnerships with San Francisco-based logistics juggernaut Prologis. ADIA teamed up with Prologis in China and NBIM in the U.S.

Gingko Tree Investment, a unit of China's State Administration of Foreign Exchange (SAFE), on the other hand, targeted the more traditional retail sector, investing in two U.K. shopping centers, located in Leicester and Bristol. Overall, sovereign wealth fund foreign direct investments in logistics, retail and industrial properties - primarily in Europe and Asia - totaled $3.2 billion in 2014.

Real Estate Investments in 2014 by Subsector, (Value in $ Billions and % of the Total)

High Valuations

In some other prime property hotspots, such as Melbourne and Sydney, a rush to buy real assets pushed up prices and some of the more opportunistic sovereign investors, such as GIC, with an estimated $315 billion in assets under management, decided to divest. In November 2014, the Singaporean sovereign fund sold an office tower at 175 Liverpool St. in central Sydney for A$390 million ($337.4 million); it also put its Australian industrial and logistics real estate portfolio on the market for A$900 million. One of the first sovereign wealth funds to enter the Australian real estate market, GIC now looks to be taking advantage of high valuations and shifting its attention to other economies in the region where entry prices are lower.

Karaoke Booths

One of the countries GIC is targeting is Japan. Like other government investors, GIC has been attracted by several factors, including cheap mortgages, strong yields and a strengthening economy. GIC's bullish stance on Japan was illustrated in August 2014, when it paid ¥170 billion ($1.6 billion) for the Pacific Century Place office building in central Tokyo - this was the biggest property deal in the country since the financial crisis.

Other sovereign investors are flocking to Japanese real estate. In 2013 the Abu Dhabi Investment Council (ADIC) had been part of a consortium that bought the Shiba Park office tower in Tokyo for ¥117 billion ($1.2 billion) in 2013, and in 2014 it committed a further $150 million to its joint venture with Australia's Goodman Group, which owns a portfolio of logistics properties including in Tokyo, Nagoya and Osaka. Qatar Investment Authority (QIA), with an estimated $304 billion in assets under management, made an even more unusual investment in Japanese real estate. In January 2014 the fund backed Singapore-based real estate investor Orange Grove Capital Management's ¥23 billion ($110 million) purchase of 17 branches of the Round One Corp., a chain of neon-lit bowling alleys and karaoke booths.

Diversification Strategy

Overall, QIA spent most on real estate in 2014, allocating $6.2 billion across 14 deals. NBIM followed, buying 13 assets worth $5.6 billion. GIC made the largest number of investments; we recorded 21 purchases worth a total $4.1 billion. These figures underscore the Singaporean fund's desire to diversify its property portfolio: GIC often invests in emerging markets where prices are generally lower than in developed ones.

All in all, sovereign wealth funds spent $23 billion on property in 2014 - but with Norway yet to unleash its full spending power on global real estate, we expect that number to rise sharply in the coming years.

Please click here to download the accompanying pdf for this article.

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