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Sovereign Wealth Funds Investing in Real Estate

by Clare Bowden

  • 16 Mar 2011
  • RE

There is a correlation between the size of a sovereign wealth fund (SWF) and investment in real estate; the larger a sovereign wealth fund, the more likely it is to invest in the asset class. Only 20% of sovereign wealth funds with total assets of below $1 billion invest in real estate. This is in stark comparison to SWFs with $10 billion or more in total assets, more than 60% of which invest in real estate.

Half of the sovereign wealth funds that invest in real estate do so both directly and indirectly, while 31% invest in the asset class solely through direct investments and 19% solely gain exposure to real estate as a result of indirect investment. Abu Dhabi Investment Authority is an example of a sovereign wealth fund with an extensive real estate portfolio, consisting of direct and listed investments as well as commitments to private real estate funds. The sovereign wealth fund plans to continue investing in the asset class and will commit to private real estate funds during 2011.

Of the sovereign wealth funds that gain exposure to real estate through both direct and indirect investments, 62% make indirect investments through both listed real estate and private real estate funds. The remaining 38% invest indirectly through private real estate funds, but do not have exposure to listed real estate investments. One such example is State General Reserve Fund of The Sultanate of Oman, which has an extensive real estate portfolio and plans to continue investing in the asset class directly during 2011.

Half of sovereign wealth funds that only invest in real estate indirectly do so solely through private real estate funds and half invest solely through listed real estate. Wyoming State Treasurer’s Office is an example of a sovereign wealth fund which only invests in the asset class through private real estate funds. It has committed to vehicles of varying strategies, including core, debt and value added.

The more risky opportunistic and value added vehicles are those most favoured by sovereign wealth funds that invest through private real estate funds. 81% and 75% of such investors have a preference for these strategies respectively. Ireland’s National Pension Reserve Fund is an example of a sovereign wealth fund that has committed to numerous opportunistic and value added vehicles. Its commitments include the value added AREA Domestic Emerging Markets Fund, which targets urban residential and retail redevelopment opportunities, and the opportunistic vehicle Fortress Investment Fund V, which targets investments backed by real estate in North America and Western Europe.

Over half of SWFs that invest in private real estate funds have a preference for debt, core and distressed vehicles. Funds of funds and secondaries remain the least preferred strategies and only 13% have an interest in each of these strategies. However, both strategies have seen an increase in popularity from last year, when 7% of sovereign wealth funds that were investing in private real estate had a preference for fund of funds and 3% had a preference for secondaries.

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