PERE NY: Sovereign capital ‘distorts markets’

The wave of capital coming from sovereign wealth funds into the world’s largest property market has sparked negative sentiment from some industry players. 

For some delegates at the PERE Forum in New York this week, the influx of sovereign capital into the US is making it riskier to both buy and sell real estate.

Adi Divgi, president and CIO of EA Global, a single family office, said sovereign capital flows have made it less desirable to sell assets because the pricing on those properties continues to keep on rising. Speaking on a sale of a New York City asset last year, he noted that he felt that he sold at a 20 percent discount to what he could have gotten today.

“I’m frustrated because I sold out not at the top,” Divgi said. “The top seems to get higher every day,” he added, speaking during a panel on de-risking real estate portfolios yesterday. “But I’m also frustrated as a small institution because I’m also priced out as a buyer.”

Divgi noted that sovereign wealth funds were not as constrained as some other institutional investors in the amounts that they could pay for trophy assets in US gateway markets. “Unlike pension plans, sovereigns have no liability streams to worry about; they just have cash to invest,” he said. Consequently, the return objectives of sovereigns may not necessarily be as high as those of a pension, he added.

Brooks Blake, partner at Verdis Investment Management, agreed that the dominating presence of sovereign wealth funds in US real estate “was not good” for the investment landscape. “It distorts markets, and it distorts market signals,” he said, adding that some unusual transactional activity was occurring as a result.

Verdis typically likes to sell assets in markets where there’s a glut of capital, but it recently bought a property in downtown Manhattan that was 94 percent leased at an 8.5 percent cap rate. The seller was a sovereign wealth fund that was offloading its downtown Manhattan portfolio after suffering losses on the properties during the downturn.

Jarrod Rapalje, senior consultant at Courtland Partners, however, took a more positive view. “Over time, the global capital flows have varied, but it certainly seems to be overwhelming now,” he said. “I would hope that provides a backdrop where we start to see a little bit of a rollover and you have this influx of capital that starts to support valuations.”