Top trends of 2007: the rise of sovereign wealth

PERE looks back at the year just passed for the trends that mattered most. Today we look at trend number four - sovereign wealth funds have become major forces in global real estate investing.

The global credit crunch continues to have the effect of draining liquidity from the real estate market. As a counterbalance to this, government-backed investment funds have full coffers from surging oil prices and currency reserves, and they are finding themselves in an enviable situation. Awash with cash, these powerful pools of capital have become increasingly involved in real estate investment, with some high-profile acquisition offers this year, including the £12 billion offer for Sainsbury’s by Three Delta, an affiliate of the Qatar Investment Authority. Though that deal was eventually scuttled, it showed the powerful position of funds that consulting firm McKinsey has named among a set of “new power brokers.”

Direct and indirect investments in real estate by state-sponsored funds is nothing new, but the size of their recent investment in both private equity buyout and real estate funds has raised the bar. A newly launched $200 billion Chinese government fund recently paid $3 billion for a minority stake in Blackstone’s management company, raising more than a few eyebrows throughout the industry. In September, The Carlyle Group agreed to sell a 7.5 percent stake of itself to Mubadala Development Company, an Abu Dhabi government investment arm, for $1.3 billion, with Abu Dhabi contributing an additional $500 million to Carlyle’s private equity funds. Apollo Management is reportedly in talks with the Abu Dhabi Investment Authority to sell a 10 percent stake of the firm’s management company for $1.5 billion.

UAE president Sheikh
Khalifa Bin Zayed
Al- Nahyan

According to a recent report by Morgan Stanley, sovereign wealth funds today control as much as $2.9 trillion, which is a trillion more than the global hedge fund industry. The report estimates that this number could grow to $12 trillion by 2015, making them the largest pool of global investment capital by that time. This growth has been accompanied by a marked increase in investment activity. Sovereign wealth funds are estimated to have invested $26 billion in financials in the past six months alone. The biggest funds are based in the oilproducing countries – such as the Abu Dhabi Investment Authority (ADIA) with $875 billion, the Kuwait Investment Authority with $213 billion and Norway’s Global Government Pension Fund with $328 billion – and the East Asian trading economies, such as the Government of Singapore Investment Corporation with $120 billion under management.

Besides taking minority stakes in private equity funds investing in real estate, sovereign wealth funds are increasingly becoming direct buyers themselves. Such recent deals have included Dubai-owned private equity firm Istithmar purchasing high-end retailer Barneys for $942 million in August, Qatar-owned Three Delta purchasing UK healthcare group Four Seasons Healthcare for £1.4 billion last September and GIC Real Estate’s purchase of Munich’s tallest office building in a €300 million deal last year. These funds are also starting to do development deals. Bahrainowned Arcapita, formerly known as First Islamic Investment Bank, formed a vehicle in September to construct 1,500 mid-income apartments in Poland for $407 million.

The appetite for foreign real estate acquisitions by sovereign wealth funds is only growing. The Norwegian Government Pension Fund, which previously had not invested directly in foreign property, has proposed adding a ten percent real estate allocation to the fund’s remit as well as a five percent allocation to private equity. And as these funds raise their real estate allocations, the global credit crunch can only help them as they compete with private equity funds for the best deals.