Sovereign Wealth Funds’ Real Estate Rush

There is a mismatch of current and target allocations for real estate that could lead to major inflows, according to Preqin.

Sovereign wealth funds (SWFs) are expected to become key players in real estate investments as they continue to diversify their portfolios and meet target allocations for the asset class, according to Preqin.

The data firm found real estate has materialized as one of the most preferred real asset investments, just behind infrastructure.

According to Preqin’s data, private real estate assets reached a record high of $742 billion at the end of 2014. Nearly 59% of sovereign funds currently invest in real estate as well, including some of the world’s largest funds—such as the Abu Dhabi Investment Authority, GIC, and Kuwait Investment Authority—with a total $18 billion allocated to the asset class.

However, even more sovereign wealth capital is expected to flow into real estate, Preqin said, as 84% of funds were under-allocated.

SWF Preqin Chart1

Specifically, some 77% of funds currently allocate up to 9.9% to real estate, but an overwhelming 93% have a target allocation of between 5% and 14.9%. The gap, Preqin said, could lead to increased allocations in the future. The world’s biggest SWF, the Norway Government Pension Fund Global, has a target allocation of 5% of its $891 billion to invest in property. The Norwegian Finance Ministry is currently considering whether to raise this target allocation.

“As they have moved to diversify their portfolios and acquire assets that help them meet their long-term objectives, alternative assets, and particularly real estate, have emerged as an increasingly important part of the portfolios of many sovereign wealth funds,” said Andrew Moylan, head of real assets products at Preqin.

The majority (85%) of surveyed SWFs invested in the asset class directly, the report said, largely made up of bigger funds with the resources to acquire “trophy assets” in major cities.

More than 60% of SWFs looked to private real estate funds, according to Preqin, mainly preferring value added and opportunistic strategies. Only 32% of sovereign funds chose to invest in listed real estate.

In addition, 90% of North American sovereign funds invested in real estate, the report said, followed by asset owners in Asia (76%) and the Middle East and North Africa region (65%).

Reciprocally, North American opportunities were most attractive to sovereign funds, with 59% of investors favoring the region. However, this figure is significantly lower than 72% in 2013, Preqin said, indicating an increasing appetite for a “more global approach to private fund investments.”

SWF Preqin Chart

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