Commercial RE holds key for SWFs

Sovereign wealth funds have been urged to increase their investment in commercial real estate as part of their strategic asset allocations.

The president and chief operating officer of McLean, Virginia-based real estate firm JE Robert Companies, Michael Pralle, said commercial real estate could provide sovereign wealth funds, such as the Abu Dhabi Investment Authority and Singapore’s Temasek, with higher long-term returns that also matched their economic objectives.

In a special article written by Pralle, the former head of GE Real Estate, says investing in commercial real estate through private equity real estate funds in particular, would allow funds to diversify away from a weak US dollar. It would also allow sovereign wealth funds to “recycle” wealth accumulated from rising oil and commodities, as well as provide opportunistic returns from investments in countries such as Central Europe, Asia and South America.

“Nations with petroleum-based economies have accumulated foreign exchange reserves beyond what is needed for currency stabilization or other short-term purposes,” Pralle said. “In focusing on these issues, sovereign wealth funds should understand the benefits of commercial real estate as they make their strategic asset allocation decisions.”

More than half of Middle Eastern funds already invest in real estate, primarily through REITs and direct real estate investing, particular in the Middle East region. However, Pralle adds that private equity real estate provides a “middle road” to funds, not only in relation to longer-term, opportunistic returns but also in terms of political impact.

“The same economic disturbances that create market mispricing and investment opportunities also tend to produce a great deal of political anxiety in countries worldwide,” he said, warning that political concerns surrounding investments by sovereign wealth funds can often take the form of protectionism, calls for greater disclosure and even more stringent requirements that apply specifically to foreign investors.

“Commercial real estate, being non-strategic and ubiquitous across multiple countries, sidesteps these concerns,” he went on to say, “giving it a definite advantage compared with many stock investments. In focusing on these issues, sovereign wealth funds should understand the benefits of commercial real estate as they make their strategic asset allocation decisions. As with any specialized asset class, it makes a difference how the investment is implemented.”

In an exclusive interview with PERE in June, Pralle revealed that he planned to make JE Robert Companies' private equity real estate arm, JER Partners, into a capital-raising “machine” that would rival the likes of Tishman Speyer and The Carlyle Group.

Pralle, who joined the firm last October, said he wanted to build JER into a global brand, with plans to triple the firm’s assets under management within five years.