CIC, Norway' GPFG and ADIA doubling down in the asset class is a welcome development, but it might not last.
Among the most frequently visited news stories on PERENews.com over the past seven days were three stories of sovereign wealth funds meaningfully furthering their commitments to real estate.
The two most popular were PERE’s exclusive about China Investment Corporation (CIC) creating a dedicated real estate department while also doubling its allocation to the asset class; and the recommendation by Norway’s Ministry of Finance that the real estate allocation of its petro-funded Government Pension Fund Global (GPFG) be extended from 5 percent to 7 percent.
The third story to capture your attention was Abu Dhabi Investment Authority (ADIA)’s official bid to privatize BR Properties, one of Brazil’s largest public property businesses, in a deal valued at around $470 million.
The common thread between these three tales? Beyond the fact CIC ($746 billion), ADIA ($773 billion) and GPFG ($825 billion) represent the three largest sovereign investment vehicles in the world, according to the Sovereign Wealth Fund Institute, each has an arguably threatened source of capital.
The price of crude oil has regained ground since being stuck at around $30 per barrel earlier this year (just under $40 at the time of writing). But it nonetheless languishes around levels where net inflows to state investment funds, particularly in the Middle East, are likely to be minimal, if at all. Meanwhile, while the Chinese purchasing manager’s index (PMI) hit a year-high of 49.7 in March, its highest level in over a year, this, and China’s other central economic driver, construction, remain at subdued levels historically, and jitters concerning the country’s health persist.
Against these backdrops, the real estate bullishness on display at CIC, ADIA and GPFG is interesting to observe. One seasoned investment bank real estate analyst even described the timing of these news stories to us as “surprising”, considering the funds’ wider contexts.
Much can be explained away by the current relative attractiveness of real estate versus other, mainstream asset classes. Real estate, after all, is currently proving it can offer less volatility than many listed options, on even the most mature exchanges, and higher sustainable income levels than many of the products available in the fixed-income world.
Just as stocks slide in value, sovereign wealth funds, like many of their institutional contemporaries, are reducing their listed ownerships too. Indeed, a Bloomberg report in February suggested as much $404 billion could be withdrawn from global stock markets by state funds this year if current macroeconomic conditions persist. That withdrawn capital is being rechanneled into hard assets, like real estate.
Similarly, with stable government 10-year bond spreads seemingly settling in at between 0.5 percent and 2 percent, their weighting in state fund portfolios has needed addressing too. Again, real estate benefits.
But before we celebrate property as one of the few islands of value in waters too calm or too choppy, here is a sobering thought: if real estate allocations are being bolstered by forces from elsewhere in the portfolio today, what is to say the same will not happen once fixed-income yields improve. Even in the low interest rate environment we have today, the margin between fixed-income products and prime real estate only needs to narrow, not close, before that mainstream asset class proves more popular once again.
Similarly, just as stock markets have reacted badly to plummeting oil and commodity prices, stabilization, even at an adjusted, lower basis, could well help investors re-determine their allocations once again. Hard assets are resource-intensive, paper assets far less so and that in itself is worth a few basis points.
Further sovereign commitment to real estate is good for real estate, no doubt. But we may well be talking about a relative victory here and on the back of incoming money that may prove neither sticky nor loyal.