Sovereign funds relook reliance on real estate sector

Sovereign funds relook reliance on real estate sector

With prime office blocks lying empty around the world, hotels half-vacant and retailers struggling to stay afloat due to the Covid-19 pandemic, sovereign wealth funds are retreating from many of the real estate investments that have long been a mainstay of their strategies.

Sovereign wealth funds (SWFs) invested US$4.4 billion (S$6 billion) in the sector in the first seven months of this year, 65 per cent down from the same period a year ago, according to previously unpublished data provided to Reuters by Global SWF, an industry data specialist.

The nature of property investments is also shifting, with funds increasingly investing in logistics space, such as warehousing, amid a boom in online commerce during the pandemic, while cutting back on deals for offices and retail buildings.

Such shifts in behaviour can have seismic effects on the global real estate market, given that such funds are among the largest investors in property and have interests worth hundreds of billions of dollars in total. Three sovereign funds sit within the top 10 largest real estate investors, according to market specialists IPE Real Assets.

It remains to be seen if the changes are structural for the funds, for which property is an asset-class staple at about 8 per cent of their total portfolios on average, or a temporary response.

“Real estate is still a big part of sovereign wealth fund portfolios and will continue to be so,” said Mr Diego Lopez, managing director of Global SWF and a former sovereign wealth fund adviser at PwC.

“What Covid-19 has accelerated is the sophistication of SWFs trying to build diversification and resilience into their portfolio – and hence looking for other asset classes and industries.”

Sovereign funds have been more bearish on property than public pension funds, another big investor in the sector, Global SWF found. While they have outstripped pension funds in overall investment across most industries and assets this year, by two to one, that ratio is reversed for real estate.


Funds are nursing hits to their existing property portfolios stemming from the introduction of lockdowns and social distancing restrictions. While other parts of their portfolio, such as stocks and bonds, have rebounded from March’s trough, a real estate recovery is less assured.

Globally, property capital value is expected to drop by 14 per cent this year before rising by 3.4 per cent next year, according to commercial real estate services group CBRE. Analysts and academics question whether the pandemic’s impact may prove long-lasting, with more people working from home and shopping online.

Ms Yolande Barnes, a real estate specialist at London university UCL, said: “I think there’s a real threat to some commercial business districts in the big cities as I can’t see us all return to the nine-to-five schlep in, schlep out.”

The value of property assets of some funds has fallen this year. Those experiencing the biggest drops include Singapore’s Temasek and GIC, Abu Dhabi Investment Authority and Qatar Investment Authority (QIA), according to data compiled for Reuters by industry tracker Preqin.

Those four funds have collectively seen the value of such assets drop by US$18.1 billion to US$132.9 billion, the data showed.

Reuters was unable to confirm whether the fall was due to lower valuations or asset sales. The funds either declined to comment or did not respond. Many sovereign funds do not publicly disclose data on property investments, with Norway’s one of the exceptions.

The Norwegian fund, which has around US$49 billion invested in real estate, up from US$47 billion at the end of last year, said last week that its unlisted property portfolio returned minus 1.6 per cent in the first half of this year.

Sovereign funds have also largely steered clear this year of new direct investments in London or Los Angeles, hot spots in normal times, according to property services firm Jones Lang LaSalle, which said SWFs were “on the defensive”.

The funds’ advance in logistics properties, such as warehousing and goods distribution centres, comes at a time of high demand as people have bought everything from toilet paper to trainers from home during lockdowns.

So far this year, logistics have accounted for about 22 per cent of funds’ real estate investments by value, compared with 15 per cent in 2019 as a whole, the Global SWF data shows.

Meanwhile, investments in offices have fallen to 36 per cent from 49 per cent last year, and in retail property, to zero versus 15 per cent.

Mr Marcus Frampton, chief investment officer of Alaska Permanent Fund Corporation, told Reuters that real estate deal volumes had “slowed down substantially” in general, but that anecdotally, he saw activity in industrial facilities such as logistics and “multi-family” apartment blocks.

The wealth fund’s holdings have risen to US$4.7 billion, up from US$4 billion at the end of June, after the purchase of multi-family and industrial Reit (real estate investment trust) stocks on July 1, Mr Frampton said. “Commercial warehouse activity is strong,” he added.

In a sign of the times, Temasek participated in a US$500 million investment in Indonesia-based e-commerce firm Tokopedia in June.

In contrast, physical retail, a significant part of many funds’ holdings, has been hit hard. QIA-owned luxury retailer Harrods in London has forecast a 45 per cent plunge in annual sales, for instance.

Ms Barnes said sovereign funds could be “lighter on their feet” than some other institutional funds and more able to adjust their behaviour to suit changing circumstances.

This content was originally published here.

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