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Sovereign Wealth Funds Continue to Invest in Real Estate

by Ibrahim Yildiz

  • 26 Apr 2018
  • RE

Sovereign wealth funds (SWFs) remain cornerstone investors within the real estate industry with their ever-growing assets under management (AUM) and increasing influence on financial markets around the world. In an industry where interest rates are low across national and international markets, many SWFs recognize the potential benefits afforded to them through exposure to the asset class, such as portfolio diversification, hedging against inflation and high risk-adjusted returns.

The majority (62%) of SWFs invest in real estate. This proportion includes some of the world’s largest, such as Government Pension Fund Global and GIC, which each allocate over $20bn to the asset class. A continuing trend from previous years, all SWFs with at least $100bn in AUM invest in real estate, owing to the array of resources and capital at their disposal.

Around four in five SWFs gain exposure to real estate through direct investments, which provide such investors with greater autonomy in the management of their assets. A notable proportion (68%) invest in private real estate funds, a similar level to previous years. North America and Europe both remain key regions for investments, each targeted by 68% of SWFs; while, 62% have a global reach for their investments, reflective of their wider scope for acquiring real estate assets, while also reducing geographic concentration risk.

Recent years have seen trends emerge in terms of the type of properties acquired by SWFs, with more investments made in niche real estate (specifically student accommodation), logistics facilities and hospitality assets. The most notable deal within the logistics sector in 2017 involved China Investment Corporation. In June of that year, the Chinese SWF acquired Logicor, a pan-European logistics company, from Blackstone Group for €12.25bn – this was the largest real estate transaction completed in the year.

While investors have faced challenges and uncertainty around a potential market downturn, real estate remains an important component of many SWFs’ portfolios. Despite some large economies starting to raise interest rates, the disparity between returns generated by real estate and fixed income remain attractive. As shown in the chart above, several of these funds have been involved in real estate transactions worth over $1bn throughout 2017 and in early 2018. Such activity highlights their presence within the industry as a major source of institutional capital. On average, SWFs allocate 7.3% of their total assets to real estate with an average target of 11.0%, illustrative of the potential to deploy significant sums of capital to the industry in the long term.

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