Record Levels of Property Investment by Sovereign Wealth Funds in 2012

State-Backed Institutional Investors Diversify Stocks and Bonds Portfolios With Real Estate Holdings

Record Levels of Property Investment by Sovereign Wealth Funds in 2012

In 2012 sovereign wealth funds sunk a record portion of their capital spending into property investment opportunities as real estate assets in Moscow, Paris and London proved more attractive than volatile equities and low-yielding bonds.

According to a study by the Sovereign Investment Lab at Bocconi University in Milan, state-backed funds made 38 property investments valued at roughly $10 billion (₤6.37 billion) last year. The size of the investment is below the $13.4 billion (₤8.54 billion) invested in 2011 but it represents 21 percent of total investments, the highest percentage on record.

“Given the very low yields in the bond markets and the volatility in the equity markets, real estate is an attractive play at the moment, especially for long-term investors,” observed the head of sovereign advisory at Permal Investment Management Services Andrew Rozanov. Property investment delivers “protection against inflation and portfolio diversification,” he added.

"I can also confirm the increasing trend of acquisition in real estate relative to previous years, which is driven by the new opportunities offered to investors in an environment with increasing inflation expectations," commented Bernardo Bortolotti, the director of the Sovereign Investment Lab.

State-backed funds have been favouring property investment opportunities in large cities in the US and Europe. These types of institutional investors usually focus on the most secure and stable areas, also known as prime markets.

The world’s biggest sovereign wealth fund by assets, Norway’s Government Pension Fund Global (GPFG), is looking into US real estate after making its first property investment in an office complex in Swiss financial hub Zurich. The $703 billion (₤448 billion) fund has also purchased commercial real estate in Paris, Frankfurt, Berlin and London as part of a plan to reduce the allocation to bonds its portfolio holds from 40 to 35 percent. Today the fund announced its first investment in US real estate – a $1.2 billion (₤763 million) deal with TIAA-CREF, seller and manager of retirement accounts for employees of non-profit institutions. GPFG said it bought 49.9 percent of five office buildings in New York, Boston and Washington DC from TIAA-CREF, which kept 50.1 percent of the ownership and will manage the buildings in a joint venture with the Norwegian fund.

Karsten Kallevig, chief investment officer for real estate at Norges Bank Investment Management, which manages the sovereign wealth fund, said he is looking for property investment opportunities on East-Coast cities initially before considering moving west. “This is the fund's first real estate investment outside Europe and is in line with our strategy to build a high- quality, global property portfolio," said Kallevig.

London also proved to be a popular destination for property investments last year with sovereign funds from Malaysia, Azerbaijan and China all buying commercial properties in the city. China Investment Corporation purchased Winchester House, currently Deutsche Bank’s London HQs, from KanAm Grund KAG last year. The fund said it intends to continue its property investment strategy in London as it seeks to reduce an “over-reliance” on US debt, according to its chairman Lou Jiwei, who spoke at a conference in Hong Kong on 14 January.

The State Oil Fund (Sofaz), Azerbaijan’s $34 billion (₤21.6 billion) sovereign wealth fund, made its first property investment in London in December 2012, when it bought an office building complex for ₤177 million. Sofaz also made purchases in Moscow and Paris. Shahmar Movsumov, executive director, said the fund had invested in properties in Hong Kong, Malaysia and Singapore last year and would look at potential acquisitions in Australia and China in 2013.

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