Sovereign wealth funds pumping more money into real estate, alternative assets

Singapore’s GIC will set up an investment platform for retail-led mixed-use assets in India. Its other investments included an industrial and logistics portfolio in Australia.  PHOTO: REUTERS

Updated from : The Business Times, 15 Jun 2021

SOVEREIGN wealth funds (SWFs) are injecting more capital into higherreturning alternative assets such as property, although some heavyweights fall short of their targets. Investments into real estate, private equity and infrastructure by such state-owned investment funds grew substantially over the past decade.

SWFs’ cumulative actual allocations to the three asset classes more than tripled to US$717 billion last year, from US$206 billion in 2011, a report by alternative assets data provider Preqin in partnership with law firm Baker McKenzie showed.

There were also “particularly large increases” in their combined target allocations to real estate, private equity and infrastructure, with the median standing at 30 per cent of total AUM (assets under management) in 2020, up from 18 per cent in 2011.

Specifically, when it comes to capital deployed into real estate, SWFs are punching “far above their weight”, the report stated.

While SWFs make up just 1 per cent of the number of property investors globally, they account for 8 per cent of real estate AUM, Preqin’s fourth quarter 2020 data showed.

Average commitment sizes in this asset class are about US$136 million, which is in line with superannuation schemes and far higher than all other investor types. Together, the top 20 SWFs’ combined actual allocations to real estate exceeded US$300 billion.

As these investors often focus on high-quality trophy assets in major cities, they are “uniquely equipped” to take long-term and counter-cyclical positions, the report noted.

Asked which property types may be more popular, Preqin head of research insights Dave Lowery said that SWFs’ propensity to hold larger, trophy assets points towards more “core” investments, often held directly rather than within fund structures. Properties held via “core” investment strategies require little asset management and generate stable income with low risk in the long run.

“These types of assets will generally fall within the office, high-end retail or hospitality sectors, but there are also growing allocations towards data centre assets, for example, which straddle real estate and infrastructure,” Mr Lowery told The Business Times. “SWFs are also targeting industrial assets through acquisitions of operating and holding companies, and through portfolio deals.”

Singapore’s GIC this month said it will set up an investment platform for retail-led mixed-use assets in India, under a joint venture with a mall developer. GIC’s other recent investments include the acquisition of a portfolio of 45 industrial and logistics assets in Australia with ESR Cayman.

Sovereign funds are among “the most patient” of capital providers, and are “attracted to long-hold strategies in assets that bring an inflation hedge, which can help them deliver on their intergenerational ambitions”, Preqin said.

However, the biggest SWFs tend to fall short of their target allocations for alternative assets. “This under-allocation relative to targets suggests that if the largest SWFs were to achieve their target allocations, capital flows to alternatives would increase significantly,” the firm noted in the report.

Some of the biggest SWFs are at the lower end of their target ranges, or below their own stated minimum levels.

GIC has a current allocation of 20 per cent of AUM to alternatives, equal to its minimum target but below its maximum target of 28 per cent. Korea Investment Corporation’s current allocation is 15 per cent, below its stated minimum target of 25 per cent.

Overall, real estate is the alternative asset class with the widest gap between target and actual allocations, at 3.3 percentage points.

But this does not necessarily mean a sharp increase in real estate commitments is imminent, Preqin said.

SWFs have remained below their real estate targets by an average of 3.1 percentage points in the past decade, thus “it would be presumptuous to expect the gap to close rapidly in the near term”, the firm added.