Sovereign Funds to Expand Property Buying After Record Year

Sovereign wealth funds from China to Azerbaijan, which pushed their real estate deal making to a record last year, are set to extend their buying spree as they seek alternatives to low-yielding bonds and volatile stocks.

The funds made 38 property investments valued at almost $10 billion in 2012, according to the Sovereign Investment Lab at Bocconi University in Milan, which has data going back to 1985. While lower than the $13 billion spent on real estate the year before, such deals were 21 percent of all sovereign fund investments last year, the highest percentage on record and topping the 2011 high of 16 percent.

“Given the very low yields in the bond markets and the volatility in the equity markets, real estate is an attractive play at the moment, especially for long-term investors,” said Andrew Rozanov, head of sovereign advisory at London-based Permal Investment Management Services Ltd. who coined the term “sovereign wealth fund” in a 2005 article. Real estate investments “typically include protection against inflation and portfolio diversification,” he said.

Sovereign wealth funds, state-owned investment vehicles that manage their countries’ surpluses from exports such as commodities, have said they plan more purchases this year, with the U.S. and Paris real estate markets among favorites.

Benchmark 10-year Treasury note yields, which averaged 1.79 percent last year, will increase to about 2.25 percent at year end, according to the median of 77 strategist forecasts compiled by Bloomberg. That would still be below the five-year average of 2.9 percent and compares with prime office property net yields of 4.6 percent in New York, 4 percent in London’s West End and 3.75 percent in Zurich, according to a December global real estate outlook from Credit Suisse Global Real Estate Research.

Europe Property

“Sovereign wealth funds are increasingly looking to boost their real estate allocation as loose global monetary policy has crushed interest rates, making investment in property relatively attractive based on the current available yield spread,” said Liz Troni, global real estate strategist at UBS AG in London.

Investments in commercial real estate in Europe will increase to about $190 billion annually over the next two years from $160 billion in 2012, predominantly driven by sovereign wealth funds, according to Patrick Thomson, London-based global head of sovereigns at JPMorgan Asset Management. The value of real estate deals in which state funds were involved grew by 36 percent in 2012 from the previous year, according to Thomson.

“Prime yields could well be under pressure as a result of a potential shortage of suitable stock and a growing list of new market entrants joining existing active investors,” Damian Corbett, head of Jones Lang LaSalle Inc.’s London capital markets division, said in a Dec. 27 statement.

Prime Locations

Sovereign wealth funds have been favoring properties in major cities in Europe and the U.S., such as London and San Francisco. Their focus is on the most stable, high-income producing areas, known as prime markets.

The world’s biggest sovereign wealth fund, Norway’s Government Pension Fund Global, plans to look at U.S. real estate after making its first property purchase in Switzerland, of a Zurich office complex, from Credit Suisse Group AG for 1 billion Swiss francs ($1.1 billion) in November. Yngve Slyngstad, chief executive officer of Norges Bank Investment Management, a unit of the Norwegian central bank that manages the state fund, told Bloomberg Television in November that the fund will seek office complexes and malls in U.S. cities.

The $703 billion fund has bought commercial real estate in London, Paris, Frankfurt and Berlin as part of a plan to reduce bond holdings from 40 percent to 35 percent of its portfolio and increase real estate to 5 percent. As of mid-January, the fund had less than 1 percent of assets committed to the sector, Bunny Nooryani, a spokeswoman, said in an e-mail.

Property Portfolio

In December, Norway’s fund agreed to pay 1.2 billion euros ($1.6 billion) to buy half of a European property portfolio from Prologis Inc., which has stakes in 195 properties in 11 countries, including Spain, Italy, Poland, the U.K. and France.

Government of Singapore Investment Corp., known as GIC, invested in a 48-story, glass-and-granite cylindrical building in San Francisco’s financial district in December, in a deal valuing it at about $950 million. The tower, which includes offices of Morgan Stanley, Merrill Lynch & Co., and Deutsche Bank AG, is “the kind of trophy asset that every sovereign fund is looking for,” Dan Fasulo, managing director of Real Capital Analytics Inc., said when the deal was being completed.

San Francisco office rents will increase 8 percent to 12 percent in 2013 amid limited new supply, according to estimates by broker CBRE Group Inc. Rates soared 27 percent in the fourth quarter from a year earlier as technology firms accounted for more than half of all lease signings in 2012.

Brazil Warehouses

GIC has a 49 percent stake in Singapore-based Global Logistic Properties Ltd., which in November said it would invest 2.9 billion real ($1.5 billion) in Brazilian warehouses, together with GIC, Canada Pension Plan Investment Board and China Investment Corp., known as CIC. CIC also has 50 percent in a venture that invested in 15 logistic facilities in Japan along with Global Logistic.

More than 70 percent of the 108 billion euros spent last year on income producing properties in Europe, the Middle East and Africa was invested in the U.K., France and Germany, broker DTZ Holdings Plc said in its outlook report for 2013. That trend will hold this year, the report’s authors, including global head of research Hans Vrensen, wrote.

U.K. office rents will likely rise 2.6 percent a year in both 2013 and 2014, according to DTZ. In Germany, they will rise 2.2 percent a year in the same period.

Popular London

London proved a popular destination last year, with wealth funds from China, Malaysia and Azerbaijan all buying office properties.

China’s CIC purchased Winchester House, leased by Deutsche Bank for its City of London headquarters, from KanAm Grund KAG, the seller announced in November, stating only that the sale price was higher than the 206.8 million pounds it paid in 2003.

CIC will continue to add real-estate assets with good returns as it seeks to cut an “over-reliance” on U.S. debt, its chairman, Lou Jiwei, told a forum in Hong Kong on Jan. 14.

The Chinese fund, ranked No. 5 in the world with $482 billion by the Las Vegas-based Sovereign Wealth Fund Institute, a research organization, increased the part of its portfolio that includes real estate to 31 percent as of the end of 2011, from 21 percent in the previous year. The fund’s 2011 annual report, published in July, said that it had “enhanced our real estate portfolio to pursue stable cash returns.”

Azerbaijan, Malaysia

Korea Investment Corp., known as KIC, “is gradually increasing investment into real estate and it plans to increase real estate holdings in the long term” from 1.5 percent of its $50.1 billion in assets, according to an e-mail from a spokesman who asked for his name not to be used, citing company policy.

In London’s West End, Azerbaijan’s $34 billion State Oil Fund made its first property investment in December, buying an office complex for 177 million pounds. The fund, known as Sofaz, also announced acquisitions in Paris and Moscow. Executive Director Shahmar Movsumov said the fund had explored real estate in Singapore, Hong Kong and Malaysia last year and would look in China and Australia this year.

Also in London, Permodalan Nasional Bhd., the Malaysian state asset manager building a 100-story office tower in Kuala Lumpur, bought three properties last year: the U.K. headquarters of law firm Linklaters LLP; the European Bank for Reconstruction & Development office next to Liverpool Street station; and an office building at 90 High Holborn. Prices weren’t disclosed.

Place Vendôme

Paris and Germany emerged as places wealth funds, which had preferred London property, turned to in 2012, said Robert Stassen, director of capital markets research at Jones Lang LaSalle in London. Sofaz, the Azerbaijani fund, bought a property that houses the offices of luxury fashion label Valentino and the Christian Dior and Mikimoto pearls retail shops in Paris’s exclusive Place Vendôme, according to the website of broker Cushman & Wakefield, which advised the fund.

Sovereign wealth funds, which typically favor markets that allow them to get in and exit quickly, may look at other cities as a lack of financing contributes to a scarcity of completed buildings in places like London, said Stassen.

“They’re not specifically targeting Europe, they’re targeting a global portfolio of which Europe is part, so you will see that if they have trouble finding assets in Europe they may start looking in North America or they may look in some of the Asian markets,” said Troni at UBS. “As long as it’s a very long-term, safe income and it’s in a market that’s liquid enough to be able to offload the asset if they have to.”

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