Sovereign wealth funds slow down real estate investments
Sovereign wealth funds have slowed down their investment in real estate, according to research from the International Forum of Sovereign Wealth Funds (IFSWF).
In 2017, the number of direct real estate and infrastructure investments made by sovereign wealth funds declined from a total $25 billion in 2016, split between 77 property transactions and 33 in infrastructure deals, to $23.2 billion, comprising only 42 deals in real estate and 28 in infrastructure.
In the property sector, there was an approximate 40 percent decrease in the number of SWF investments in private markets between 2016 and 2017. SWFs are finding it more difficult to buy properties; more institutional investors have recently entered the sector, increasing competition for high-quality assets and pushing asset valuations higher.
Most significantly, SWFs reduced their investment activity in commercial and office properties. These types of assets, however, still represent 40 percent of the total invested in real estate, with 17 deals out of 42 in the year, down from 25 out of 76 in 2016.
SWF interest in luxury hotels, another traditional cornerstone of several SWFs’ real estate strategies, has also declined over the past year to only five deals, a reduction of more than 75 percent from 18 deals in 2015. In 2016, the trend was also downward, with only 11 transactions.
The slowdown in SWFs real estate transactions may also be emphasized by the fact that the more recently established sovereign wealth funds are strategic funds, such as Kazakhstan’s Samruk-Kazyna or Italy’s CDP Equity, with a mandate to develop their home economies, rather than to save national wealth, and are not active in international real estate markets.
Despite overall volumes of SWF investment in real estate being lower, they have continued to look down the value chain for more attractively priced assets. SWFs are showing a sustained interest in mixed-use or residential rental properties. In developed markets, these property types looks attractive, as it allows investors to harness two secular trends: large aging populations looking to downsize and move out of the family home, and the millennial generation currently priced out of property ownership. Singapore’s GIC has also shown interest in mixed-use developments in emerging markets, including a joint venture with Indonesian property developer Intiland Development to own and manage the South Quarter integrated mixed-use complex in Jakarta.
A number of SWFs that have previously been active property investors have reduced their overall exposure to the sector, taking advantage of high valuations to sell assets they acquired at low prices after the global financial crisis. For example, Australia’s Future Fund and real estate investment firm TH Real Estate sold 685 Third Ave. in New York City, to Japanese real estate company UNIZO Holdings for $467.5 million — almost two-and-a-half times the purchase price in 2010 (the Future Fund entered the partnership in March 2011).
