I have spent the better part of my eight years at PERE (and a career total of 14 years, including stints at Property Week and City AM) writing about sovereign wealth funds. More than likely, you have witnessed the public part: the faithful reporting of large direct deals, typically where (insert name of any oil-rich Middle Eastern SWF) wants to diversify its holdings for future prosperity or for something to do when the oil runs out.
The private aspect of my job, however, you likely won’t have seen: moaning from behind the comfort of my computer screen about the lack of transparency, a general suspicion that none of these deals are any good and, more recently, confusion over whether SWFs invest in real estate opportunity funds anymore, especially global ones, like they did in the good old days.
On this latter point, I have rationalized the fact that SWFs lost money on 2005 – 2007 vintage funds as being evidence that they are indeed no good at investing. Otherwise, they would have seen that managers were playing Russian roulette by massively overdoing the leverage, wouldn’t they?
However, I admit that there is another explanation for my unwillingness to believe that SWFs are good at real estate investing – jealousy. Jealousy that, as an Englishman, I am unlikely to watch my own country splash the cash around like Kuwait, Abu Dhabi or Norway, or ever get close to one, for the very simple reason that the UK doesn’t have one.
Perhaps that is why I positively lapped up a recent press release (marked STRICTLY UNDER EMBARGO UNTIL 00.01 SATURDAY 10 MAY 2014) entitled “Use QE funds to create UK sovereign wealth fund.” Putting aside the inexplicable reason for the embargo being a time when most sensible people are either a) tucked in bed or b) out having a good time (and certainly not reading a press release about sovereign wealth funds), one can understand my keenness to read on.
“Today, we release a major new independent report entitled ‘Unconventional monetary policy explored: the case for replacing quantitative easing (QE) with a UK sovereign wealth fund’, authored by Rob Thomas, former Bank of England economist and now director of research at The Wriglesworth Consultancy.”
Now, I don’t know Mr Thomas, but if I did I certainly would buy him a beer. Because, as a much cleverer person than I, he has not only put his finger on the very question that I never even properly realized I had, but he has answered it as well. That is to say, why can’t the UK have a SWF?
Granted, given my subconscious jealously over other nations’ SWFs, I am going to be easily persuaded, but surely Mr Thomas is correct in his thesis. “The Bank of England has bought some £375 billion of government bonds (gilts) under QE, equal to £6,000 for every person in the country (his emphasis). These bonds could be sold off and the proceeds used to establish a UK sovereign wealth fund aimed at financing UK infrastructure projects. £375 billion could pay for HS2 (a new high-speed rail link) and a new London airport four times over.”
I further quote Mr Thomas directly: “Five years after the UK embarked on QE, we need a rethink. QE has pushed up asset prices, benefitting the few, and it has failed to stimulate investment. We can use these funds to build for the future for the benefit of the whole country.”
In my open letter to Mr Thomas, I simply say I couldn’t agree more, except on one point. He clearly sees merit in infrastructure, but I respectfully submit he is overlooking real estate – global real estate.
The readership of PERE, which includes SWFs, does not need any argument to convince them that investing globally in real estate is a healthy diversifier. To be honest, investing globally via property funds – and even sweeter via opportunity funds – would be even better as far as this publication’s interests are concerned.
According to the report, which stretches to 83 pages, how a ‘monetary financed’ SWF could work is the Bank of England gradually would sell its gilt portfolio acquired under QE and use the proceeds to establish the fund, which would be run by a separate body answerable to the Bank of England. This proposal would not interfere with the normal operation of monetary policy, and the Bank of England would be free to raise interest rates or reduce the monetary base through open market operations.
Just to hammer home the advantages, establishing a SWF would directly stimulate demand by increasing investment expenditure in areas like transport and housing. It would start to rebalance the economic recovery away from its current reliance on consumption. It would avoid inflating asset prices in the way QE has, and it could provide the nation with a better yield than that received on the gilt portfolio acquired under QE. It could even become a source of countercyclical demand in the future.
Mr Thomas, without a doubt, I can say you are my favorite economist. I only hope the rest of the country is listening to you.
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