Overseas Wealth Funds Ramp Up Activity As Strenthening Economy Brings New Cachet to American CRE
Sovereign wealth funds (SWFs) have grown at a remarkable pace over the last decade, quadrupling from an estimated $1 trillion in assets under management in 2000 to $4 trillion today, and expected to hit $6 trillion within two years. So it shouldn’t come as a surprise that U.S. property owners are abuzz about the new interest American real estate is generating among foreign investors representing such diverse governments as China, Singapore, Qatar and Norway.
Evidence that SWFs are emerging from their two-year recessionary slumber is more than anecdotal. While the number and value of sovereign fund deals fell to its lowest ebb in five years during the first half of 2009, the investment pace picked up vigorously in the third and fourth quarters and into 2010, according to a new report by Cambridge, MA-based consulting firm Monitor Group and Fondazione Eni Enrico Mattei (FEEM), a Milan, Italy-based international research center.
Funds monitored by the groups for the report executed 113 publicly reported deals worth $68.8 billion last year -- about 40% below 2008 totals. However, in what the authors view as a vote of renewed confidence in global markets, SWFs reported a dramatic uptick in activity during the second half of 2009, accounting for 85% of the year’s transactions, according to the Sovereign Wealth Fund (SWF) report titled "Back on Course: Sovereign Wealth Fund Activity in 2009."
Funds made almost double the number of investments in the final six months of the year as in the first and spent nearly six times as much, $58.1 billion versus $10.6 billion. They also showed renewed interest in real estate as a preferred asset to park their investments late in the year, logging $4 billion during the fourth quarter.
Sovereign funds, pension funds and REITs expect to be very active in U.S. real estate investment going forward as the economy recovers, CoStar analysts said. Only about half a dozen of these wealth funds presently have an existing real estate portfolio. But the attractiveness of the U.S. market relative to Europe is quite high at present.
At an average 5% allocation to real estate, wealth funds could inject a couple of hundred billion dollars of equity into global real estate markets, with much of it finding its way into the U.S.
"SFWs have been active globally and they’re coming to the U.S. because London has been bought up and people perceive a recovery in the U.S.," said CoStar Group Director of Advisory Services Hans Nordby. Recovery is still a work in progress for the office market because vacancy rates haven’t quite topped out yet and more rent losses are coming. But the SWFs believe the economy is turning and capitalization rates for U.S. property are relatively attractive compared to other world markets, Nordby said.
As for markets being considered for investment, Nordby said SWFs "don’t take connecting flights," and prefer a half-dozen major U.S. metropolitan areas. "They like tall shiny buildings that will impress their brother in law. This trend doesn’t benefit El Paso," Nordby said.
"The foreign investors that have come to the U.S. over the last year have been very well rewarded on two fronts," he said. "One, values are up for long-leased assets in the SWFs' select set of major metros. Two, they placed their money into dollars, and dollars went up. Investors like it when that happens."
The Greek financial crisis has made investors think twice about investing in the euro zone. But the overriding factor for the SWFs is the growing strength of the U.S. economy, Nordby said.
"The leading reason SWFs are looking at the U.S. is not that Europe looks more dangerous than it did six months ago, which is true," he said. "But more importantly, the U.S. is showing economic growth -- investors love growth -- and it looks like some of the risk is rung out. A lot of these people are investing for yield and the U.S. looks like a good place to be."
According to the Monitor/FEEM report, the sovereign fund expending the most capital was the Qatar Investment Authority, which made 14 reported investments valued at over $32 billion. The China Investment Corp. (CIC) and the Government of Singapore Investment Corp. led in the number of transactions with 17 and 18, respectively. Several funds that had been quite active during 2007 and 2008 -- notably Dubai’s Istithmar, but also Singapore’s Temasek -- largely withdrew from the market to reassess their strategies in the aftermath of the global financial crisis.
SWFs are trying to spread their risk by co-investing as part of a consortium or with other funds, noted William Miracky, senior partner at Monitor Group.
"We’re seeing an evolution in the behavior of SWFs," Miracky said. "For example, for the first time, we saw funds invest jointly to share risk while maintaining market exposure to a diverse range of asset classes and sectors, a trend we expect to continue."
GIC and Temasek Holdings of Singapore paired up to invest in the IPO of Chongqing-based property developer Longfor Properties Co., while China’s CIC and the Qatar Investment Authority partnered last year to buy 40% of Songbird Estates, which owns much of the Canary Wharf financial district of London, for $885 million in a combination of preferred and common stock.
SWFs invested in three main markets in the world’s democratic countries last year, the United Kingdom (8 deals, $2.85 billion); the U.S. (6 deals, $3.25 billion) and Canada (5 deals, $3.31 billion).
"This suggests that North American markets, having been largely shunned by SWFs for much of 2008 and 2009, are beginning to become more attractive," according to the Monitor/FEEM study.