Sovereign Wealth Funds Expected to Invest $725B in Commercial Property Markets Around World
- Sep 23, 2008
By Anuradha Kher, Online News EditorLondon–Sovereign Wealth Funds (SWFs) will potentially invest as much as $725 billion in the world’s commercial property markets over the next seven years, according to a new global report from CB Richard Ellis Group Inc. Although more than half of the SWFs are believed to already hold direct commercial real estate investments, allocations to the sector are expected to rise substantially. The potential impact on the global real estate market is significant. Ray Torto, chief global economist at CB Richard Ellis, explains, “Given that the real estate sector’s investment characteristics – current income combined with long-term appreciation — closely match SWF requirements, we expect them to increase their weighting of commercial property to approximately 7 percent of their total assets. With nearly $4 trillion of total assets currently under SWF control, a 7 percent allocation would mean worldwide commercial real estate investments totaling $280 billion. To put this number in context, the entire U.S. institutional-grade property portfolio owned or managed by investment managers and plan sponsors is valued at approximately $330 billion today.”The influence of SWFs is expected to be felt across the world. In order to achieve target allocations, SWFs will need to diversify future investment widely across geographies, sectors and investment vehicles. Thus far, SWF property investments have been largely concentrated in the U.S. and the Middle East. “Although SWFs are likely to continue to focus on core real estate product in major markets, they will have to put capital to work in new geographies and emerging sectors. Favored future destinations are expected to include Japan, the U.K. and other countries with currencies that are not held in the SWF’s foreign reserves,” says Michael Haddock, director EMEA Research, CB Richard Ellis. He continues, “However, SWFs will have to look to both the indirect investment market and the debt market to fully meet their objectives in the real estate sector. It is also very possible that we will see outright acquisitions of property companies – listed and unlisted – as a way of assembling a significant direct real estate portfolio rapidly as well as acquiring the property management infrastructure to go with it.” He adds that the SWFs’ increased investment in real estate may help stimulate a recovery in the secondary market for real estate debt. The dislocations within the debt market may provide attractive investment opportunities for equity-rich SWFs with long-term investment horizons.