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Azerbaijan oil money buys £177m Central London asset

The State Oil Fund of Azerbaijan has bought 78 St James in London from RREEF Real Estate's German open-ended real estate fund, grundbesitz Europa.

Azerbaijan oil has flowed into London commerical real estate with the country’s State Oil Fund buying an office investment at 78 St. James in the West End of London for £177 million (€217 million; $287 million). RREEF Real Estate announced the deal today, declaring it had sold the asset on behalf of its German open-ended real estate fund, grundbesitz Europa.

The 118,000-square-foot office asset is located in the heart of St James, one of the most exclusive office locations within London, and is let to HSBC until 2023. RREEF Real Estate said it initially purchased 78 St James via a ‘turn-key’ agreement in September 2002, conditional on completion of the building in 2003.

James Petit, head of UK and Ireland for RREEF Real Estate, said: “We have undertaken this sale to capitalise on the growing demand for London properties from overseas capital. However, London is and will remain an important investment market for the fund.”

In a move somewhat similar to Norway’s Petroleum Fund (now called the Norwegian Government Pension Fund Global), State Oil Fund of Azerbaijan (SOFAZ) only recently received the green light to begin investing in real estate for the first time. In a state magazine article earlier this year, executive director Shahmar Movsumov explained that SOFAZ had grown considerably since it was established more than a decade ago, and the $30 billion fund has now become a major source of funding for large-scale national strategic projects, such as the construction of the Baku-Tbilisi-Ceyhan oil pipeline. One of the main aims of the fund, however, is to reduce dependence on oil, hence the desire to move into non-oil sectors.

Responding to a question on key strategic priorities of SOFAZ’s investment programme for 2012, Movsumov said: “Recently, several amendments have been made concerning the rules of foreign currency asset management. Consequently, SOFAZ’s investment spectrum had broadened considerably.” He noted that, according to its investment policies, the fund is now able to invest in new asset classes, such as real estate and gold.     

Azerbaijan expects several important oil and gas streams to come online in the next five years, with those revenues flowing into SOFAZ. As a result, Movsumov said assets are expected to rise to $34 billion by the end of 2012. More impressively, he predicted that assets would reach $200 billion within the next 10 to 15 years.