Safe bet? Sovereign wealth funds once considered reliable real estate

LONDON (Reuters) – The COVID-19 pandemic has forced sovereign wealth funds to make it rather unthinkable.

With leading office blocks lying empty around the world, hotels half empty and retailers struggling to stay afloat, the funds are pulling back from many of the real estate investments that are a very basic part of their strategies.

Sovereign wealth funds (SWFs) invested $ 4.4 billion in the sector in the first seven months of 2020, down 65% from the same period a year ago, according to previously unpublished data provided to Reuters by Global SWF, an industry data specialist .

The nature of investing in real estate is also changing, with funds increasingly investing in logistics space, such as warehousing, amid a boom in online commerce during the pandemic, while cuts to offices and retail buildings are being cut.

Such shifts in behavior could have seismic effects on the global real estate market, given such funds are one of the largest investors in possession and have interests worth a total of hundreds of billions of dollars. Three sovereign wealth funds are among the top 10 largest intangible property taxes, according to market specialists IPE Real Assets.

A major question is whether the changes are structural to the funds, for which property is a stack of asset class at about 8% of their total portfolios on average, as a temporary response to an enormous, unexpected and unknown global event.

“Real estate is still a large part of sovereign wealth funds’ portfolios and will remain so,” said Diego López, CEO of Global SWF and a former sovereign wealth fund adviser at PwC.

“What has accelerated COVID is the boredom of SWFs trying to build diversification and resilience in their portfolio – and thus looking for other asset classes and industries.”

Sovereign wealth funds have been more bearish on property than public pension funds, another major investor in the sector, Global SWF found. While this year they have outpaced the pension funds in general investment in most industry and assets, by two to one, this ratio is reversed for real estate.

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FUTURE OF THE OFFICE

Funds are nursing hits for their existing property portfolios that stand out from the introduction of lockdowns and social-distancing restrictions. While other parts of its portfolio, such as equities and bonds, have returned from the trough of March, a recovery period of real estate is less certain.

Value of equity is globally expected to decline by 14% in 2020 before rising by 3.4% in 2021, according to commercial real estate service group CBRE. Analysts and academics are questioning whether the impact of the pandemic could last long, with more people working from home and shopping online.

“I think there’s a real threat to some commercial business districts in the big cities, because I can not get all of us back to the 9-to-5 slam in, slam out,” said Yolande Barnes, a real estate specialist at London University UCL.

The value of assets of some funds has fallen in 2020, with those experiencing the biggest drops, including the Temasek Holdings and GIC of Singapore, Abu Dhabi Investment Authority (ADIA) and Qatar Investment Authority (QIA), according to data that ‘ t for Reuters are compiled by industry tracker Preqin.

Those four funds have seen the value of such assets collectively decline by $ 18.1 billion to $ 132.9 billion, the data showed.

Reuters could not confirm if the fall was due to lower valuations than asset sales. The funds refuse to comment or not.

Many sovereign wealth funds do not disclose data on investment in property, with one of the exceptions being Norway.

The Norwegian fund, which has invested about $ 49 billion in real estate, up from $ 47 billion at the end of 2019, said last week that its unlisted portfolio of assets returned minus 1.6% in the first half of 2020.

Sovereign funds have also largely cleared new direct investment in London or Los Angeles by 2020, hotspots in normal times, according to real estate agency Jones Lang LaSalle (JLL), who said SWFs were “on the defensive”.

LOGISTICS AND BIOTECH

The advancement of funds in logistics properties, such as warehousing and goods distribution center, comes at a time of high demand as people have bought everything from toilet paper to house trainers during lockdowns.

So far this year, logistics have compared about 22% of the real estate investments of funds by value, compared to 15% in 2019 as a whole, the Global SWF data shows.

Meanwhile, investment in offices fell to 36% from 49% last year, and in retail property to zero against 15%.

Marcus Frampton, chief investor at the Alaska Permanent Fund Corporation (APFC), told Reuters that the volume of real estate had ‘substantially’ decreased, but that he saw anecdotal activity in industrial facilities such as logistics and “multi-family” apartment blocks.

Wealth fund holdings have risen to $ 4.7 billion, up from $ 4 billion at the end of June, following the purchase of multi-family and industrial REIT shares on July 1, Frampton said.

“Commercial warehouse activity is strong,” he added.

In a sign of the times, Temasek participated in a $ 500 million investment in Indonesia-based e-commerce firm Tokopedia in June.

In contrast, physical retail, a significant part of the holdings of many funds, has been hit hard. QIA-owned luxury retailer Harrods in London is expected to see a 45% increase in annual sales as visitor numbers drop. Many other retailers have sought to renegotiate rentals.

The outlook appears brighter for some new sectors such as biotech, which emerged during the pandemic.

“We have seen an important demand for space for life sciences. That varied from office to specialist lab and warehouse space, ”said Alistair Meadows, head of JLL of UK Capital Markets.

For a picture of Sovereign wealth found in real estate:

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DISTRESSED OPPORTUNITIES

The U.S. office market is expected to vacate more space than rented in the first year since 2009, according to CBRE.

However, investors are betting on a rebound of sorts in some quarters. For example, Canary Wharf Group, partly owned by the QIA, unveiled last month plans for a major new development for mixed-use, including business space, in the financial district of London.

And although hotels face enormous challenges, occupancy rates are expected to rebound close to pre-COVID levels – but not until the end of 2021.

The Libyan Investment Authority has experienced problems with the operating costs of some of its properties, including some hotels in Africa owned by its subsidiary, President Ali Mahmoud Hassan Mohamed told Reuters.

But it remains committed to its real estate portfolio, estimated at $ 6.6 billion in its last valuation in 2012, because it could restore its value, he said.

However, crises can also present opportunities.

In the aftermath of the pandemic, some funds may seek out bargains as distressing properties emerge.

Hong Kong Monetary Authority, which operates a fund, told Reuters it would “closely monitor market conditions to capture appropriate opportunities”.

And in an uncertain world, some academics claim that real estate remains a solid bet for smart investors.

Barnes of UCL said sovereign funds could “lighten on their feet” than some other institutional funds and be more able to adapt their behavior to changing circumstances.

“Real estate is one of the better sectors to be in, in a world of unrest,” she added. “But it’s all about choosing the right real estate.”