Fresh research from Invesco has shown that on average sovereign wealth fund's (SWF) real estate portfolio allocations have risen from 3 percent to 6.5 percent over a three-year period – faster than allocation increases in private equity and infrastructure combined.
Following the global financial crisis, SWFs shifted towards alternatives in a bid to diversify returns and gain access to liquidity premiums. This shift to alternative assets accelerated as quantitative easing drove down returns on government bonds and put pressure on portfolio returns relative to targets.
And, according to Invesco's Global Sovereign Asset Management Study 2016, the winner within the alternatives space has been real estate. In the study the SWFs explained that real estate achieves diversification benefits and meets their absolute return expectations with fewer execution challenges than private equity or infrastructure. Only 34 percent of SWFs polled by Invesco cited challenges sourcing direct deals for real estate compared to 55 percent for infrastructure and 58 percent for private equity.
The study also revealed that SWFs believe that, in comparison to private equity and infrastructure there are a greater number of credible asset managers in real estate as well as a long list of developers and operators to partner with on a more direct basis.
SWFs also expected the percentage of real estate investments via direct investments or operator and developer partnerships to increase. According to the study, 50 percent of real estate investments are currently either done directly or through a partnership. Close to 35 percent of sovereigns expect this percentage to increase in the future.
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