SWFs set to allocate more to global real estate


I like this.


An eternal optimist, Liu-Yue built two social enterprises to help make the world a better place. Liu-Yue co-founded Oxstones Investment Club a searchable content platform and business tools for knowledge sharing and financial education. Oxstones.com also provides investors with direct access to U.S. commercial real estate opportunities and other alternative investments. In addition, Liu-Yue also co-founded Cute Brands a cause-oriented character brand management and brand licensing company that creates social awareness on global issues and societal challenges through character creations. Prior to his entrepreneurial endeavors, Liu-Yue worked as an Executive Associate at M&T Bank in the Structured Real Estate Finance Group where he worked with senior management on multiple bank-wide risk management projects. He also had a dual role as a commercial banker advising UHNWIs and family offices on investments, credit, and banking needs while focused on residential CRE, infrastructure development, and affordable housing projects. Prior to M&T, he held a number of positions in Latin American equities and bonds investment groups at SBC Warburg Dillon Read (Swiss Bank), OFFITBANK (the wealth management division of Wachovia Bank), and in small cap equities at Steinberg Priest Capital Management (family office). Liu-Yue has an MBA specializing in investment management and strategy from Georgetown University and a Bachelor of Science in Finance and Marketing from Stern School of Business at NYU. He also completed graduate studies in international management at the University of Oxford, Trinity College.

By James Williams – Sovereign Wealth Funds are showing a lot of appetite for real estate assets as total AUM in this segment of the alternative funds space continues to build and investors look to diversify their portfolios. 

North America remains the most favoured region, with 59 per cent of SWFs allocating to that market; down from 72 per cent in 2013 according to the latest research by Preqin in its 2015 Preqin Sovereign Wealth Fund Review.

Indeed, 57 per cent prefer a global approach, broadening out their portfolios to include trophy real estate assets as well as exposure to private RE funds that are capable of providing additional revenue streams beyond the core markets of London and New York. Some 55 per cent of SWFs are currently allocating to Europe.

The most revealing statistic to underscore the potential for further growth in global real estate is that 45 per cent of SWFs who are active in this asset class still invest less than 5 per cent of their total AUM. That is a significant figure and one that could well climb over the next couple of years as SWFs make strides to get closer to their strategic targets.

“There continues to be a lot of opportunities from SWFs. A lot are still in the early stages of getting into real estate and those that already are allocating remain below their target allocations. Global real estate is becoming a more widely targeted asset,” comments Andrew Moylan, head of real estate products at Preqin.

“A lot of new capital will go into direct investments but we’ve seen a lot of money going into funds as well. If private real estate fund managers are looking to launch new funds there are good opportunities to raise capital from these institutions.”

Allocation targets

Currently, 59 per cent of SWFs invest in real estate; this is up on 54 per cent in 2013.

From a portfolio perspective, 57 per cent of SWFs have a target allocation to real estate of between 5 and 9.9 per cent. However, only 32 per cent are currently hitting that target. This can be partly explained by the fact that it takes time to build a real estate portfolio.

Take the Norwegian Government Pension Fund Global. It currently invests USD818 billion directly in global real estate. That is an enormous figure and yet it only accounts for 5 per cent of its total AUM; putting that amount of capital to work in the right real estate assets takes time. So whilst the allocation targets of SWFs remain slightly off, this is not to infer that they have fallen out of favour with real estate.

Real estate is a long-term asset class and equally it takes multiple years to scope out the right opportunities.

Since 2013, SWFs have upped their strategic targets because they view the asset class favourably and consider it a good way to meet their long-term return objectives.

“A lot of investors like real estate and will continue to build their allocations over the years to get to where they want to be. As such, I believe we will start to see the percentage of SWFs targeting a 5 to 9.9 per cent allocation increase from the current level of 32 per cent over the next 12 months. But it will be a gradual process.

“We continue to view SWFs as being a very important source of capital to the global real estate industry,” comments Moylan.

In the future Moylan suspects that more institutions will allocate between 10 to 14.9 per cent but the numbers will not likely go stratospheric; again, this is a function of size. A five to 10 per cent allocation will likely be the sweet spot as most SWFs simply won’t be able to effectively put their capital to work beyond that level. Currently, 14 per cent allocate more than 10 per cent of their total AUM to real estate.

Private real estate funds

These are propitious times for private real estate fund managers as the amount of new capital looks set to continue to increase.

At the end of 2014, private real estate AUM reached a high-water mark of USD742 billion. This year, Blackstone has already broken the record for closing the largest ever closed-ended real estate fund – Blackstone Real Estate Partners VIII. The fund raised a staggering USD14.5 billion, some USD1.5 billion higher than initially targeted.

“It’s encouraging to managers from a capital raising perspective because there is clearly continued growth in institutional demand for RE exposure. Perhaps the challenge, given the rise in valuations and increased competition from SWFs, who are buying real estate directly, will be for managers to deploy capital effectively.

“SWFs tend to go for trophy assets in major markets and that has pushed up prices quite a lot. Private real estate fund managers need to find attractive assets at attractive prices. They’ve got to find opportunities to meet their return objectives and it’s getting harder to do that,” says Moylan.

In this context, increased appetite among SWFs to allocate to private funds – which currently stands at 64 per cent compared to 86 per cent who are investing directly in real estate – is somewhat of a double-edged sword. Managers will welcome the improved capital raising environment but not necessarily the increased level of competition from direct investors.

That so many SWFs often go direct is largely reflective of the size of AUM and the internal resources they have available to make these investments. “They have dedicated teams so that trend of investing directly will continue, but certainly private funds will be well positioned to attract further assets moving forward,” opines Moylan.

Rise of debt funds?

Within the private debt fund space, value-added (75 per cent) and opportunistic (71 per cent) are the most popular strategies favoured by SWFs, with only 7 per cent favouring secondaries and fund-of-funds respectively.

Debt funds are the preferred choice of just over half of investors (54 per cent). Along with distressed funds (61 per cent), these are likely to continue being used by SWFs as part of a global diversified strategy. As referred to above, 86 per cent invest directly in core assets but distressed and debt funds could, in addition, deliver a high risk high return profile to SWFs.

“These investors certainly see opportunities in debt, it has grown a lot in the last few years, and they are prepared to commit capital to these funds. If you are a manager raising a new real estate debt fund or distressed fund then absolutely, SWFs are potentially good groups to target,” comments Moylan.

Northeast US – A haven for value-added strategies

Since 2008, fundraising has fluctuated for Northeast US-focused unlisted real estate funds. Aggregate AUM peaked at USD2.8 billion from nine funds closing in 2011; this compares to 2014 where aggregate AUM was USD1.7 billion among seven funds.

From a strategy perspective, value-added funds dominate this corner of the market, which includes the cities of New York and Boston. Since 2013, nine value-added funds have closed with USD1.9 billion in AUM, compared to just two opportunistic funds, one debt fund and one core-plus fund. Moreover, all six funds that closed last year were running value-added strategies.

One feature that seems to characterise Northeast US-focused funds is that they are run by smaller, niche managers and are far removed from the widely diversified funds run by the likes of Blackstone and other multi-billion dollar managers. According to Preqin’s figures, over the last 10 years 56 per cent of managers have raised less than USD500 million for their funds. That figure drops to 13 per cent for those managers who have raised between USD500 million and USD999 million.

“Recently we’ve seen a split in fund raising; whilst Blackstone can raise huge amounts of money for new funds, we are also seeing institutional investors getting interested in specialist players. There is definitely room for these smaller managers to raise assets if they can present themselves as value-added specialists with a specific geographic focus, such as Northeast US for example,” says Moylan, who adds:

“I think the reason for interest among investors in value-added funds is because of the way the market has responded over the last couple of years; valuations have been improving but at the same investors have been prepared to take on a bit more risk. That combination has meant that the appetite for value-added funds has been quite strong.”

The good news for managers is that investors remain under-allocated to Northeast US. Only 36 per cent have a current allocation of between 5 and 9.9 per cent, compared to 55 per cent who have a target allocation of between 5 and 9.9 per cent.

Listed funds

Whilst it is clear from Preqin’s research that SWFs are primarily focused on making direct investments into real estate and/or supplementing their portfolios with private real estate funds, there is still some appetite for listed real estate vehicles as well. Currently, 32 per cent of SWFs allocate to listed real estate funds.

One of the most prominent SWFs that have been exclusively allocating to listed funds is the National Social Security Fund – China although it has now been awarded the imprimatur to invest in domestic and overseas private real estate funds.

Because of the size and the sophistication of assets in SWFs, these investors simply prefer to invest direct. Also, because they take such a long-term view there’s no issue with having their capital tied up for 10, 15 years in an asset that they like.

In Moylan’s view, though, the listed fund space could well enjoy further growth moving forward.

“Listed real estate is much more liquid and easy to get in and out of but potentially doesn’t offer the same level of diversification as direct real estate does because it is that much more closely correlated to the stock markets. For SWFs that don’t have much real estate exposure, buying REITs or equivalent listed products would be a sensible way to gain initial exposure so there could be some growth in the listed space from new SWF entrants,” says Moylan.

This is more likely to happen at the lower end of the SWF scale, among those with less than USD1 billion in total AUM. Currently, only 13 per cent of these SWFs invest in real estate; the listed route could well be an option for these investors over the mid-term.

This is especially the case for regions such as South America, where currently no SWFs allocate to real estate because they run stabilisation funds that require liquid portfolios.

“In South America there are still more restrictions on institutional investors from investing in global real estate. But that is an area where we could see regulations getting relaxed in the coming years, freeing up more capital. If you look at Asia, for example, over the last few years we’ve seen restrictions on investors allocating to domestic markets steadily relax and that has added capital to the global real estate market,” explains Moylan.

There is, it seems, a lot to be positive about in the real estate market for 2015.

The appetite among SWFs is increasing so for fund managers there are plenty of opportunities to raise new capital.

At the same time, however, because more SWFs are buying direct real estate it means that valuations are rising, the level of competition is increasing and managers are having to look further afield to find attractive opportunities beyond the dominant markets of London and New York.

In that sense, the current market environment presents both an opportunity and a challenge for real estate managers.



Tags: , , , , , , , , , , , , , , , , , , , , , , ,

Post a Comment

Your email is never published nor shared. Required fields are marked *


Subscribe without commenting