In the next year, two-thirds of sovereign wealth fund investors are planning to increase their allocations to real estate globally, and 64 percent will increase allocations to their domestic markets, according to investment manager Invesco’s annual report on sovereign wealth funds.
Invesco Global Sovereign Asset Management Study 2016, released Monday, detailed how 77 investors plan to confront a “challenging macro environment,” marked by falling oil prices and a low return environment. Real estate allocations, which were up to 6.5 percent in 2015, compared with 3 percent in 2012, have increased faster than allocations to private equity and infrastructure combined, according to Atlanta-based Invesco.
“Fewer execution challenges have made real estate a more attractive asset class to sovereign investors than infrastructure and private equity,” the report said, citing speed of capital deployment and ease of sourcing direct deals for real estate compared with other alternative investment strategies.
As sovereign wealth funds increase real estate allocations, they are also changing their strategies. Investors based in Asia and Africa reported that they were more likely to focus on expansion beyond high-profile assets in gateway cities, noting competition for these properties and fears about a pending down cycle. In addition, investors in the Middle East and North America are becoming more focused on direct investing. In 2015, half of real estate investments were made through direct investments or operator and developer partnerships, and about 35 percent of funds expected this percentage to increase.
“Sovereigns explained that as their real estate allocations increase and competitor intensity grows, they will seek to participate further along the value chain to maintain returns,” the report said.
Across alternative assets, sovereign wealth funds picked the US as the top destination for foreign investment, edging out the UK. Last year’s changes to the Foreign Investment in Real Property Tax Act (FIRPTA), which now exempts qualified foreign pension plans from being taxed for the disposition for a real estate asset, was cited as a motive for direct real estate purchases in the US.
“The US has always been viewed as a leading economy with high private sector attractiveness, but over the past two years its attractiveness to sovereign investors has increased significantly,” the report said. “Some sovereigns explained that the US appears increasingly open to their investments following positive perceptions of sovereign investments into the US financial sector during the global financial crisis.”