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Sovereign Wealth Funds Investing in Real Estate

Despite ongoing economic uncertainty and the continuing impact of the sovereign debt crisis, we have not seen a return to the widespread withdrawals from sovereign wealth funds (SWFs) that occurred in the aftermath of the global financial crisis, and the aggregate total assets of all sovereign wealth funds worldwide has continued to increase apace. SWF total assets under management have increased by nearly 14% since 2011, and now stand at $4.53tn. Nonetheless, there remains the possibility that some institutions will be required to cover the fiscal shortfalls of governments in the future.

Total assets held by SWFs have increased significantly over the last year, and this in turn has led to growing levels of capital feeding allocations to the various asset classes. As new SWFs are launched and existing formation plans come to fruition, such as in respect to Ghana and Iran’s new funds, it is clear that this group of investors will remain an important potential source of capital for investment managers worldwide. SWFs tend to have longer-term investment horizons than other types of investors. Unlike pension funds or insurance companies, for example, SWFs do not have liabilities to meet and as such they are more able to invest significant amounts of their portfolios in longer-term and alternative investments.

SWFs represent a significant section of investors in the real estate asset class. 53% of SWFs are known to invest in real estate, and a further 6% are considering investing in the asset class. Larger sovereign wealth funds are more likely to invest in real estate. 83% of SWFs with more than $250bn in total assets invest in real estate, and 50% of SWFs with total assets between $100-149bn invest in real estate. Only 25% of SWFs with less than $1bn in total assets invest in real estate. Overall, 62% of SWFs invest both directly and indirectly in the real estate asset class, 26% only invest in real estate directly, while 12% only invest indirectly.

A large proportion (85%) of sovereign wealth funds make direct real estate investments. Kuwait Investment Authority (KIA) is one SWF that invests directly in the asset class. The $296bn SWF invests directly in real estate both in domestic and international markets. It also commits to private real estate funds and to listed real estate. Hong Kong Monetary Authority (HKMA) is another SWF that invests directly. Its real estate exposure comes via its wholly-owned subsidiary, Real Gate Investment Company (RGIC). Through RGIC, HKMA has indirect stakes of 74% and 51% in two real estate joint venture companies respectively.

59% of SWFs invest in private real estate funds. New Mexico State Investment Council invests in private real estate funds and aims to create a diversified portfolio with respect to region, strategy, and property type. The sovereign wealth fund also invests directly in the asset class and its real estate allocation is split equally between direct investments and private real estate funds. Listed real estate is less popular with sovereign wealth funds, with 35% including listed real estate investments as part of their real estate allocation.

Posted by Sarah Unsworth on 04-Apr-2012

Keywords: real estate investors, sovereign wealth funds, private real estate, sovereign wealth fund investment