In buying the Pine Avenue Tower A in Seoul, the State Oil Fund of Azerbaijan (SOFAZ) has assumed portfolio concentration risk. The $447 million acquisition, its biggest capital outlay to date, means the real estate portfolio of the Caucasian sovereign wealth fund is 40 percent weighted to one market. Worse still, that exposure is represented by just one asset.
“The over-exposure concern? That came up a lot in our internal discussions,” Ruslan Alakbarov, global head of real estate at SOFAZ, told PERE. “We originally wanted to do the deal through a 50:50 joint venture with a local player, but that didn’t work out.”
By Alakbarov’s reckoning, the opportunity to buy the 700,000-square-foot tower in Seoul’s central business district – leased to S&K Group, one of Korea’s biggest conglomerates – was too compelling to be thwarted by a lack of viable partners. “It’s very difficult for a foreigner to get into Korea,” he said. “Yes, the size was an issue but, rather than lose the transaction, we thought let’s buy and then, in time, we can sell down with no pressure on us.”
An acquisition price lower than three rival bids and a yield of 5.25 percent sweetened the decision. “I think we got it at a good price,” Alakbarov added.
Finding a suitor for a stake in the office in the future may or may not be possible, but Alakbarov is unconcerned. He argued that, given that the state fund only has been investing in the asset class since December 2012, future investments should address the imbalance.
Although just three or four more direct acquisitions are possible under the current allocation, Alakbarov pointed out how Azerbaijan’s swelling state reserves should mean that SOFAZ’s coffers will increase to at least $100 billion over the next decade. That should provide plenty of scope to build the portfolio.
“Also, we are considering increasing the 5 percent ceiling, if it is hit,” Alakbarov said. “The favored allocation for funds like ours is now 12 percent, which leaves room for increases.”
Beyond Seoul, future acquisitions in Asia are expected in Tokyo, Sydney and Singapore. “I think, over the course of this year, you will hear from us again making other transactions in the region,” Alakbarov said. And SOFAZ is not done in Europe either, with Germany being one other market where the fund plans to be invested.
Given its plans to continue building its portfolio, SOFAZ’s biggest play thus far should amount to no more than a teething issue – and mean that it should not be overweight to Korea for long.
Finding its feet
SOFAZ has been investing in real estate for less than two years, making it one of the more junior sovereign wealth funds in the market.
Generally speaking, Azerbaijan’s sovereign wealth fund is an institution very much finding its feet when it comes to making investments in real estate. Still, it is looking to be as self-taught and independent as possible, particularly in these early years.
A four-strong team, led by Ruslan Alakbarov, has been mandated to invest 5 percent of total assets, or approximately $1.85 billion, into the asset class. Investments, which started in December 2012, have been core in nature, transacted directly and sometimes not with partners.
Four assets have been acquired in London, Paris, Moscow and now Seoul. Those accounted for more than $1 billion of the fund’s quota, meaning there is approximately $800 million left to deploy under the current mandate.
Looking forward, Alakbarov said SOFAZ’s direct holdings would be supplemented with indirect commitments to funds so it can be exposed to higher-yielding, value-added strategies. Investing in value-added assets has not been possible so far because the team is required to work in Baku and cannot hire foreign nationals, making it tougher to meet the physical requirements that come with repositioning problem assets or drawing from the relevant experience internally to do so.
Although a rough target currently, Alakbarov said up to 20 percent, or $400 million, of the real estate allocation could be deployed into private equity real estate funds. That figure could increase in tandem with the size of SOFAZ’s coffers.
Offering a conservative forecast, Alakbarov predicted that the sovereign wealth fund of the former Soviet republic could grow by a further $100 billion over the next decade, depending on oil prices and discoveries. At 5 percent, that would mean its real estate allocation would become $5 billion and its indirect portion $1 billion. He also suggested that, should SOFAZ meet its allocation, it could well be extended, acknowledging how it is way below the average 12 percent real estate allocation of its institutional peer group.
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