Sovereign Wealth Funds Investing in Private Real Estate Funds

by Sarah Unsworth

  • 27 Apr 2012
  • RE

Almost 60% of sovereign wealth funds (SWFs) invest in private real estate funds. Opportunistic and value added are the strategies most favoured by SWFs that invest in unlisted real estate funds, with 75% and 65% of such institutions having an appetite for these strategies respectively. New Zealand Superannuation Fund is one SWF that has committed to a number of value added and opportunistic funds. It has invested in Willis Bond Capital Partners, a value added fund that invests in mixed use, residential, commercial, office, retail, and industrial assets in New Zealand. Gateway Capital Real Estate Fund III is an opportunistic real estate fund that New Zealand Superannuation Fund has committed to. The fund targets opportunities in the Greater China region.

While opportunistic and value added funds are relatively high risk, 55% of SWFs that invest in private funds also have a preference for core vehicles. Lower risk/return profile core funds became increasingly popular with all types of investors following the financial crisis and sovereign wealth funds are no different. Debt and distressed strategy funds are favoured by 55% and 45% of investors respectively, while 40% of SWFs have a preference for core-plus vehicles. Real estate funds of funds and secondaries funds are the least popular strategies among SWFs that invest in private real estate funds, with just 10% of these types of investors expressing a preference for investing in these funds.

Although the real estate asset class has experienced difficulties over the past few years, a significant proportion of SWFs still invest in the asset class, and many will make new commitments in 2012. Texas Permanent School Fund State Board of Education has recently made several commitments to real estate. It committed $75mn to TA Realty Associates X and $50mn to OCM Real Estate Opportunities Fund V in 2011, and in January 2012 it committed $50mn to Prudential Senior Housing Partners IV. Alberta Heritage Savings Trust Fund intends to continue investing in direct real estate in 2012 and National Pensions Reserve Fund will also continue to invest in real estate in 2012, committing to private funds on a case-by-case basis.

Temasek Holdings is optimistic about opportunities created by the needs of growing middle income populations in Asia and other markets, and intends to remain active in the real estate market. That said, while many sovereign wealth funds are likely to remain active in the real estate asset class, the real estate portfolios of many SWFs were negatively affected by the financial crisis and some remain cautious about investing in the coming year.

A number of new SWFs were launched last year and, as these new funds mature, they are likely to diversify into alternative assets, such as real estate. The diversification and potential for attractive returns offered by real estate investments means that the asset class is likely to remain an attractive option to investors and to sovereign wealth funds in particular.

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