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After Racking Up $10 Billion in U.S. Property Buys Last Year, Sovereign Wealth Funds Look to Be Net Sellers This Year

Government Investment Funds Slowing Real Estate Investments as Private Equity Funds Step Up
August 9, 2018
The 875-room Grand Wailea Resort in Wailea, Hawaii, was the grand prize in the Government of Singapore Investment Corp.'s $1.64 billion portfolio sale earlier this year to the Blackstone Group.



Government-owned investment funds, which were responsible for more than $10 billion in U.S. commercial property buys in 2017, have become net sellers of properties so far in 2018, according to CoStar transaction data.

Moreover, these funds, commonly referred to as sovereign wealth funds, have backed away from real estate investment globally, the result of increased competition from the large number of private institutional investors that have entered the sector, according to a first-ever study of real estate investment activity from the London-based International Forum of Sovereign Wealth Funds.

The increasing competition for high-quality real estate assets has pushed sale prices ever higher, which has prompted sovereign wealth funds to become sellers, the institute reported in its study, and which CoStar data confirms.

Through the first six months of 2017, sovereign wealth funds acquired $3.55 billion in U.S. properties while selling just $705 million, according to CoStar data.

The pattern has reversed drastically this year. Through the first six months of 2018, sovereign wealth funds bought just $325 million in properties, while selling $1.73 billion.

Globally, the trend began last year as sovereign wealth funds began feeling symptoms of 'real estate fatigue,' the institute reported.

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 in property, and 33 in infrastructure, to $23.2 billion, comprising only 42 deals in real estate and 28 in infrastructure.

In the property sector, there was an almost 40% decrease in the number of investments between 2016 and 2017.

Most significantly, sovereign wealth funds reduced their investment activity in commercial and office properties. Typically, their most active investment sector, those properties accounted for just 17 deals out of 42 in the year, down from 25 out of 76 in 2016.

Sovereign wealth fund interest in luxury hotels, another traditional cornerstone of these investors, also declined last year to only five deals, a reduction of more than 50% from 11 transactions in 2016, the institute reported.

One reason for the decline, according to the institute's study, is that many sovereign wealth funds have a mandate from their government sponsors to invest in their home country first rather than chase the best returns internationally.

As a result, a number of sovereign funds that were previously very active property investors, have reduced their overall exposure to the sector, taking advantage of the current high valuations to sell assets they acquired at low prices after the financial crisis, the institute reported.

For example, Australia's Future Fund and real estate investment firm TH Real Estate late last year sold 685 Third Ave. in New York City to Japanese real estate company Unizo Holdings for $467.5 million - almost 2.5 times the purchase price they paid in 2010.

In its annual 2017 review, the Abu Dhabi Investment Authority, established by the Government of the Emirate of Abu Dhabi, noted that investment conditions in the U.S. continued to move into the latter stages of what has been an extended cycle and accordingly, competition for assets continued strong with asset prices climbing and returns slowing, particularly in core markets.

As the investment cycle matured, the authority, which has nearly $62 billion invested in global real estate, said it slowed the pace of acquisitions.

Despite the reduced appetite for real estate, sovereign wealth funds have continued to look for more attractively priced real estate.

This year, the world's largest sovereign wealth fund, the Government Pension Fund of Norway with more than $1 trillion in assets and managed by Norges Bank, acquired a 45% stake in a new logistics property in San Francisco for $29.1 million, with industrial property investment trust Prologis holding the other 55%.

While a buyer in that deal, the Norway fund also sold its 45% stake in 27 logistics properties in Chicago, Florida and New Jersey, for $110 million. It has also sold an office property in Paris and has an agreement to sell another there as well as one in Munich.

Billion Dollar Club Getting Bigger

The slowdown in real estate investing on the part of sovereign wealth funds is likely to continue if, as it appears, competition from a growing number of large private institutional investors continues.

The number of those various sponsored investment funds that allocate $1 billion or more to real estate has grown to 499 funds in 2018 from 442 in 2017, a 13% increase, according to newly released data from Preqin, a private equity data and research provider.

"The 'billion dollar club' of real estate has grown to almost 500 members and the allocations of these investors now exceed $2.5 trillion, accounting for the vast majority of capital dedicated to the industry," Tom Carr, Preqin's head of real estate, said in announcing the findings. "It is striking that this figure has grown so much over the past year, and perhaps reflects a trend towards inflation-hedging and non-correlated assets on the part of investors."




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