The year 2009 has become synonymous with investor fatigue. In February, Michael McCook, the former real estate investment officer of the biggest US pension fund (CalPERS), donned a representative cap for the sector and told GPs at the PERE Asia Forum in Hong Kong not to expect much in the way of new commitments this year.
In March, a key theme emanating from MIPIM, the world's largest property jamboree in Cannes in the south of France, was that of sovereign wealth fund fatigue when it comes to investing in third-party-managed property funds, owing to poor returns on their investments over the last couple of years.
More recently in April, Abu Dhabi Investment Company's new head of private equity, Samir Assaad, was quoted in various media reports stating that the firm planned to launch an international real estate fund, as well as four other funds, in a month.
Abu Dhabi Investment Council … is taking back the responsibility for its real estate investments.
The proposed launch of a dedicated real estate fund by the Abu Dhabi Investment Company, an investment arm of the Abu Dhabi government owned – Abu Dhabi Investment Council, has done little to quell what many working in real estate in the region already know: that sovereign wealth is taking back the responsibility for its real estate investments.
Abu Dhabi is one geography intent on reducing its blind pool, discretionary limited partnerships in 2009. Qatar is another. Conversations with sources close to these petro-dollar powerhouses suggest others paddle from the same boat.
Bearing in mind a fall in direct global real estate investment volumes generally, expect more direct investing: investments like the Abu Dhabi Investment Authority's $800 million purchase of a 75 percent stake in the Chrysler Building in New York or the Qatar-Kuwait $3.95 billion joint purchase with Boston Properties of New York's GM Building and three other assets from US real estate magnate Harry Macklowe. Expect fewer big cheques for GPs: commitments like the $800 million China Investment Corporation handed to Morgan Stanley Real Estate Investing for its Morgan Stanley Real Estate Fund VII Global.
It is one thing declaring a direct investment strategy over an indirect strategy, but it is another thing entirely to successfully implement such a strategy.
A few caveats are needed for this analysis. Sovereign wealth funds have fewer checks and measures than do other institutional investors. They also are not required to make fast asset class re-allocations because of the denominator effect and in the case of petro-dollar funds, they can find themselves with sudden inflows of capital if fuel prices spike, leading to a need for quicker investment decisions. Perhaps it is worth being prepared for a sudden U-turn in policy.
Also, as one GP told PERE, it is one thing declaring a direct investment strategy to the detriment of an indirect strategy, but it is another thing entirely to successfully implement such a strategy. To be successful in direct investing, the GP said, an international network of experienced staff and offices is a must. Some sovereign wealth funds have recruited from the West, but a prerequisite to joining some of these organisations is that you must live in the region where they are based, even if you focus on Europe, for example. The Abu Dhabi Investment Authority, for one, requires this. Not every talented real estate investor from the West will be prepared to move to the Middle East, regardless of compensation.
One GP labelled sovereign wealth's decision to go it alone as a “knee-jerk reaction” and symptomatic of where we are in the investment cycle. If so, then for the GP, sticking close to those sovereign wealth funds already tied up in limited partnerships is a must. Former CalPERS man Mc-Cook reiterated this point in Hong Kong on behalf of US pension funds.
Ultimately, sovereign wealth funds may arrive at a blended programme – direct investing close to home, such as in the MENA region, and limited partnerships for the rest of the world, managed by highly motivated and experienced GPs.