Sovereign Wealth Funds Begin To Gaze To Real Estate
According to JLL, the evolving investment habits of sovereign wealth funds (SWF) and the emergence of a new mega fund will significantly change the geography of the global real estate market.
The statement comes as sovereign wealth fund, Qatar Investment Authority (QIA) announced their purchase of Asia Square Tower 1, a world-class commercial development located in Singapore’s Marina Bay business and financial district, for US$2.45 billion. The 43-storey property, which is being sold by global investment management firm BlackRock, comprises more than 1.2 million square feet of Grade A office space and nearly 40,000 square feet of retail space. The sale represents the largest single-tower real estate transaction in Asia Pacific to date, and the second-largest single-tower real estate transaction globally.
SWFs (sovereign wealth funds)are renowned for taking a long-term view on asset acquisition, but their attitude towards real estate is changing, as is their exit strategy for property assets.
Equity markets have remained volatile, leading many sovereign wealth funds to weight towards real estate. Norway’s Norges, the world’s largest sovereign wealth fund with more than US$880 billion in assets, recently increased its weighting to real estate from 5 percent to 7 percent.
That single act puts an additional US$17 billion into play for real estate assets globally, but it’s not the only factor that signals a long-term trend.
Middle East Sovereign Wealth Funds
Oil is one of the biggest determinants of SWF investment behaviour. Some of the largest sovereign wealth funds are based in the Middle East and, like Norges, funded by their parent country’s oil earnings. This makes the Middle East an influential player in the sovereign wealth fund arena.
The Head of JLL’s International Capital Group (ICG) in MENA, Fadi Moussalli, says Middle Eastern sovereign funds have changed their investment style for real estate assets in recent years.
“Where once they bought core and held for the very long term, their behaviour is now trending towards value creation, followed by exits,” Moussalli says. “A number of these sovereign funds no longer hesitate to monetise profits if return thresholds are achieved. Profits come from either value creation via active asset management, or via capital appreciation due to solid acquisition timing.”
Moussali says when other global investors slowed investment during the Global Financial Crisis, the ability of Middle Eastern SWFs to buy during the period remained intact.
“Some of these sovereign funds are now sitting on significant gains realised from acquisitions made during 2009-2011, which have turned out to be fantastic vintage years,” he says.
While oil has been the prominent driver for Middle Eastern sovereign fund investment strategies to date, it likely won’t remain that way for long.
“Clearly Middle Eastern SWFs are funded from oil production surpluses,” says Arthur de Haast, JLL’s Global Head of Capital Markets, “but Qatar relies more on gas, so its fund is less impacted.”
“Other funds such as the Abu Dhabi Investment Authority (ADIA), are now so large they do not rely on constant injections of new capital from oil surpluses. They are generating significant income and capital returns from their core holdings.”
Other significant sovereign funds, such as Singapore’s GIC and China’s CIC, are not oil driven so are not impacted by oil market fluctuations.
Saudi Arabia sovereign wealth funds
The emergence of a new Saudi SWF has global investment markets buzzing – including real estate.
According to Moussalli, the majority of Saudi Arabia’s sovereign cash reserves had, to date, been invested in short-term financial instruments managed by the Saudi Arabia Monetary Agency (SAMA), the country’s central bank. To date, the Saudi Government had never invested in overseas direct real estate, choosing instead to focus on the domestic market via its Public Investment Fund (PIF).
“Reforms have been announced, which has prompted talk of an ADIA-like Saudi sovereign wealth funds emerging,” says Moussalli. “The forthcoming mega-IPO of Aramco would be the starting point of this new SWF. Proceeds of that IPO are supposed to flow into the chest of this new sovereign investment fund, which would then reinvest in a broad range of assets that are not correlated to oil price fluctuations.”
“Global fund managers foresee a considerable new cash pocket in the works. Assuming this happens, it is true that a new formidable, global investor will emerge.”
“However, the truth is that no one yet knows what the new platform will be like, what its approach to risk will be, which asset sector it will weight towards, nor what its geographical diversification will look like.”
“It will be some time before all ingredients are ready for it to start investing.”
Regardless of where Saudi Arabia’s new sovereign wealth fund points its considerable weight towards, global real estate markets seem assured to receive more funding allocations from the SWF sphere, particularly the UK, Germany and the United States.
“Given that Gulf State currencies are pegged to the U.S. Dollar, the U.S. real estate market will benefit from increased SWF focus on real estate,” Moussalli says. “Middle East SWFs are less transparent, making asset allocation hard to predict, but we expect them to weight up to 10 percent of the investment pool to real estate.”
Fadi is a Regional Director based in Dubai and member of the International Capital Group which focuses on harnessing cross-border capital flows between the four regions of the Americas, Asia Pacific, Europe and the Middle East. The group is dedicated to serving global clients who wish to build international portfolios. Working with and extending the reach of the existing Capital Markets teams, the Group’s aim is to develop and manage sell and buy-side mandates, focusing on assets valued in excess of US$ 100 million.
Prior to joining Jones Lang LaSalle in January 2007, Fadi was based in London with BNP Paribas where his remit encompassed of regional bond transaction origination and distribution within the Middle East. Fadi worked on several high profile emerging markets and Middle Eastern structured bond mandates including structuring and raising capital for Islamic Sukuks transactions. During this time, Fadi developed an extensive network of contacts with Middle Eastern investors including banks, government bodies and family offices.
Fadi has an MA in Economics from University of Paris IX Dauphine and an MBA from Paris Graduate School of Management.