SWFs waiting on ‘distress’

The world’s sovereign wealth funds are targeting mainly trophy real estate assets, as they wait on the anticipated unloading of ‘distressed’ properties in the US. In the long-term, SWFs are looking to partner with key US players, expanding their roles beyond 'static asset owners.’

The perception among the world’s sovereign wealth funds that the “US is on sale,” has been tempered by the fact that there are as yet very few “distressed” buys available, according to US-based private equity real estate fund managers.

Speaking at IMN’s second annual Real Estate M&A, Private Equity & REIT Privatization conference in New York today, GPs argued that despite the perception of distress in the US real estate markets generally, distressed properties existed largely in the US residential markets.

Marc Halle, managing director at Prudential Real Estate Investors, told the conference there was a lack of distressed prime properties, such as trophy office assets in Manhattan. Rather, distressed opportunities were focused mainly in US residential markets, such as Florida and Phoenix. He was backed by Jay Weaver, principal at Walton Street Capital, who added that sovereign wealth funds were much more interested in purchasing “trophy assets” in the US. In the current climate, he went on to say, sovereign wealth funds were pulling back and being much more cautious – there is “not a lot of distressed” in the market at the moment, he said.

Over the long term, however, sovereign wealth funds will be looking to work with strong operating partners, Sri Sambamurthy, managing director at Starwood Capital Group, said. He added that the market could expect the wealth funds to partner with US players to look at opportunities not only in the US but in the global market as well. In the long term, Sambamurthy added, sovereign wealth funds wanted to be more than just “static asset owners.”

The increasing importance of sovereign wealth funds in the private equity real estate space was highlighted in a recent report released by German real estate investment firm Degi, which said sovereign wealth funds are expected to invest $150 billion (€106 billion) in real estate by 2010.

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.

The largest real estate portfolio is held by the Abu Dhabi Investment Council, with an estimated volume of $70 billion.