The word on the street is that sovereign wealth funds are returning to private real estate. One capital markets professional told PERE this week they will be “back in force.”
Invesco, the Atlanta-based manager, agrees. After a pandemic period in which sovereign investment was subdued as these institutions supported their various governments in efforts to stabilize their countries, Invesco predicts a significant gear change in their approach to the asset class in the near term.
In its ninth annual Global Sovereign Asset Management Study, published on Monday, the manager said 72 percent of the 82 sovereign wealth funds and 59 central banks included in the research saw the pandemic’s impact on markets as now offering a “strong opportunity to invest” in real estate.
Among the most prolific investor types after the global financial crisis, sovereign wealth funds will undoubtedly grab the attention of managers worldwide with their return to the sector. This was, after all, a cohort responsible for $51 billion of direct investment in the heady year of 2015, the first of the plateau-at-the-top-of-the-cycle years before the oft-predicted ‘black swan event’ materialized as a coronavirus. That number, from real estate transactions research house Real Capital Analytics, was followed by another $30 billion in 2016 and $32 billion in 2017.
It fell to just $13 billion last year, the period in which Invesco’s study said 58 percent of investment sovereigns registered withdrawal demands from their governments. Subsequently, sovereign allocations to real estate fell to 8.3 percent in 2021, down from 9 percent in 2020 and 8.7 percent in 2019.
Those state funds with capital supplies dependent on the prices of commodities have been notably withdrawn from the market. Among those dependent on demand for hydrocarbons, RCA saw just one direct investment by Qatar Investment Authority since January 2020, while the Abu Dhabi Investment Authority, Kuwait Investment Authority and the State Oil Fund of Azerbaijan each were net sellers.
Demand returning for these commodities as economies rebound is expected to precipitate a new trajectory, Invesco predicts. But what will they buy in the bifurcated market they return to, one now characterized by demographic, social and technology changes that have accelerated?
Predictably, Invesco sees them joining the throngs currently stampeding into sectors like logistics, residential and digital real estate and any properties displaying resilient ESG credentials. Similarly predictable, wholesale investing into pre-covid darlings like offices and hotels is over. Fellow trade publication Pensions and Investments reported in June how ADIA, for example, was reviewing its office holdings, alongside its retail properties, which had suffered from the effects of the pandemic.
In a market still replete with capital – joint research by associations INREV, ANREV and PREA counted $239 billion in fund dry powder alone at the start of 2020 – effective deployment is not the same equation it was when the sovereigns were at their dominant last-cycle zenith. For one, the competition from other institution types is unequivocally fiercer today.
To that point, here is a spoiler alert: PERE has just finished compiling the data for the next Global Investor 100 ranking to be published in October. Where once sovereign money reigned supreme, it has now been replaced by insurer and pension capital that has continued to actively deploy throughout the crisis. It is hard to see how, after a couple of years of muted activity, these investors will be able to get back on top.