SWF to invest $150bn in RE by 2010

As the world’s largest sovereign wealth funds benefit from rising energy prices and growing economies, many are expected to increase their allocation to the real estate asset class. A report from German real estate investment firm Degi predicts allocations will rise to 15 percent over the next few years, from an average of four to 11 percent.

Sovereign wealth funds are expected to allocate up to 15 percent of their funds to real estate over the coming years, investing a total of $150 billion (€95 billion) by 2010, a report by German real estate investment firm Degi has said.

Degi, part of the Aberdeen Property Investors group, said sovereign funds were becoming a “new force” in the real estate investment world, with 35 countries having raised a total of 47 sovereign funds. Brazil is in the process of establishing the latest fund, while discussions are underway to create funds in Bolivia, Japan, Thailand and India.

Although significantly smaller than pension funds in terms of investment volume, sovereign wealth funds are expected to invest a total of $12 trillion by 2015, up from $3.3 trillion in 2007. Degi said though the allocation to real estate could rise to 15 percent, up from an average of four to 11 percent at present.

Norway is one fund that has already publicly said it would increase its allocation to real estate. The €251 billion ($389 billion) Government Pension Fund of Norway, or “oil fund” as it has become known, increased its allocation to real estate in April to five percent, equivalent to €13 billion. The fund’s chief executive Yngve Slyngstad told Reuters at the time that rising oil prices meant the fund’s assets were growing by about $1 billion each week.
The Canadian sovereign fund, the Alberta Heritage Fund, also allocates a significant portion of its fund to real estate, almost 11 percent of its $17 billion fund or $1.8 billion in total. The largest real estate portfolio is held by the Abu Dhabi Investment Council, with an estimated volume of $70 billion. The Degi report noted that around two-thirds of sovereign wealth funds invest in real estate, most of which is done directly rather than through investment vehicles.

Although specific data was hard to come by, Degi said sovereign wealth funds had “an obvious and rising interest” to invest in real estate, in a bid to diversify their funds. Predicting allocations to hit 15 percent in the near future, it added: “[This is] not least due to the great growth dynamic and stronger risk and return orientation of the [sovereign wealth] funds.”

Degi, founded in 1972, currently manages assets worth €6.4 billion through open-ended property funds. It was bought by Aberdeen Property Investors, the property arm of Aberdeen Asset Management, in March this year.