Azerbaijan State Oil Fund to back property funds

The $37 billion sovereign wealth fund is conducting due diligence on private real estate funds to supplement its growing direct portfolio.

The State Oil Fund of the Republic of Azerbaijan (SOFAZ) is to make equity commitments to private equity real estate funds for the first time, PERE has learned.

According to Ruslan Alakbarov, the $37 billion sovereign wealth fund’s global head of real estate, a loose target of up to 20 percent of its real estate allocation – currently 5 percent of the state fund’s total assets or $1.9 billion – could be committed. That suggests it would be ready to deploy approximately $370 million.

However, that figure could increase dramatically if the Azerbaijan government increases the size of the fund. Alakbarov said the overall fund could grow to $100 billion over the next ten years, subject to oil prices and discoveries. In that scenario, SOFAZ’s real estate allocation could reach $5 billion, meaning its allocation to funds would rise to as much as $1 billion.

“Conservatively we expect that,” he said. “That, naturally, would increase our allocation.”

SOFAZ may also increase its allocation to the asset class, according to Alakbarov. “Average allocation for [sovereign wealth funds] is currently 12 percent which leaves us with plenty of room to increase our allocation,” he said.

Alakbarov said Baku-based SOFAZ was currently “studying a number of private equity real estate funds, their offerings, their track records”. SOFAZ’s focus is on funds pursuing value-added strategies. “It wouldn’t make sense to employ them for core investments as we are doing them ourselves. So it would have to be value-add,” Alakbarov added. 

SOFAZ this week announced it had completed its largest property acquisition to date, paying $447 million for the Pine Avenue Tower A in Seoul which it acquired from four Korean institutions. The deal, struck at a 5.25 percent net initial yield, follows acquisitions by the state fund in London, Paris and Moscow, the first of which happened in December 2012. Including Pine Avenue, SOFAZ has invested more than $1 billion of equity and has about $800 million left to invest under its current mandate.

It expects to make further direct investments. Among its target markets in Asia are gateway cities Seoul, Tokyo, Sydney and Singapore and in Europe, Alakbarov identified Germany as a target market.