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Real Estate Overtakes Commodities as Top Sovereign Asset

Real estate topped the list of sovereign wealth funds’ investments last year, overtaking commodities and financial services, according to Institutional Investor’s Sovereign Wealth Center.

Properties made up 26 percent of investments by these funds last year, up from 14 percent in 2011, according to the center’s report on investment trends by the funds released today. That’s followed by financial services and commodities, each accounting for 23 percent, down from about 30 percent a year earlier, it said.

State funds have increased investments in alternative assets including real estate and private equity after monetary policy easing lowered the prospects for bond returns and added to the volatility of stocks. They are expected to add more of these holdings in 2013, Victoria Barbary, director at the Sovereign Wealth Center, said in an e-mail.

“Sovereign wealth funds will continue to diversify their portfolios into so-called alternative assets, responding to macroeconomic risks by adopting niche alternative strategies and making small adjustments to their asset allocations,” Barbary said. The asset composition in 2013 will be similar to last year and the investment trend is a “new normal” for these funds, she added.

Sovereign wealth funds had sought out assets in developed markets last year, especially commercial properties in London and Paris, according to the report.

Norway’s Strategy

Norway’s Government Pension Fund Global will be among the biggest buyers of real estate this year as it seeks to meet its target allocation of property, the London-based institute said.

The $747 billion sovereign wealth fund, the world’s biggest, has bought commercial real estate in London, Paris, Frankfurt and Berlin as part of a plan to increase real estate to 5 percent, according to the fund. Properties made up 0.9 percent of its holdings at the end of March, it said in April.

China Investment Corp. will add more real estate assets as it seeks to cut an “over-reliance” on U.S. debt, Chairman Lou Jiwei said in January, while Abu Dhabi’s fund Mubadala Development Co. said property helped boost assets last year.

Infrastructure made up 12 percent of the investments by the state funds, followed by consumer goods at 4 percent, according to the report.

“The emphasis on these sectors shows that sovereign funds are undertaking more diversified, long-term strategies,” according to the report. “Uncertainty in public markets is driving this trend.”

Declining Investments

The amount of publicly disclosed investments by 21 funds it tracks fell 17 percent to $53.3 billion last year, according to the report. Europe drew the bulk of the investments, accounting for 53 percent, followed by the Asia-Pacific region at 18 percent and North America at 9 percent, it said.

The biggest investment was the $1.23 billion purchase of a U.K. shopping mall, followed by a $1.1 billion office complex in Switzerland, the report showed.

The decline in investments isn’t a sign that state funds withdrew from the market, Barbary said.

“We suspect it is due to market uncertainty and a number of large infrastructure and property deals which took time to source and complete,” she said, adding that last year’s deal volume and spending patterns were broadly similar to those in 2011.

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