Sovereign Wealth Funds Investing in Real Estate – November 2013

by Jack Jackson

  • 15 Nov 2013
  • RE

Preqin data shows that a significant 54% of sovereign wealth funds invest in real estate. MENA, North America and Asia are the regions in which the largest proportions of sovereign wealth funds are based, with 33%, 19% and 28% of these investors based in these regions respectively. The vast majority (71%) have a current real estate allocation of less than 7.4%, with the largest proportion, 38%, currently allocating between 5% and 7.4% of their assets to the asset class. In comparison, on average, the target allocation to real estate of sovereign wealth funds is 7.9%. This would suggest that there is still capital to be invested in the asset class by sovereign wealth funds.

Larger sovereign wealth funds show a greater preference for investing in real estate; 100% of sovereign wealth funds with over $250bn in assets are currently actively investing in the asset class, with 80% of those managing $100-249bn in assets including a real estate allocation. Smaller sovereign wealth funds are less likely to invest in real estate. Forty-two percent of funds with total assets of $1-9bn are investors in real estate, while only 14% of funds with less than $1bn in assets invest in the asset class.

Opportunistic and value added vehicles are the most favoured by sovereign wealth funds, with 74% and 65% respectively investing in these strategies. Fifty-seven percent of sovereign wealth funds show a preference for core real estate, a slight increase from the 55% of funds that showed a preference for this strategy in 2012. Sovereign wealth funds have also shown an increased appetite for distressed and debt real estate vehicles, with the proportion of sovereign wealth funds targeting each of these strategies standing at 57%.

North America continues to be the most favoured region to invest in real estate for sovereign wealth funds, with 72% of funds expressing a preference for investing in North America through private fund commitments. Europe and Asia are preferred by 55% and 52% of sovereign wealth funds investing in real estate, while 31% and 24% of sovereign wealth funds have a preference for MENA and Australasia. Fifty-two percent of sovereign wealth funds that commit to private real estate funds invest globally, showing that many SWFs desire a diverse real estate portfolio by location to minimize concentration risk. The MENA region has seen rapid development in recent years, and MENA-based sovereign wealth funds have largely been a driver of this development of real estate in the region. Ninety percent of MENA-based sovereign wealth funds invest in the MENA region.

The real estate industry has had a tough road to recovery since the financial crisis, with fund performance not living up to the returns of the pre-2008 era. Investors in private real estate funds are more selective in choosing fund managers, and are committing less capital to vehicles. Despite this, sovereign wealth funds remain prolific investors in the sector, providing much needed capital to help stimulate development domestically and internationally.

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