In its latest review, Preqin finds that sovereign wealth funds investing in real estate in 2016 have moved away from higher risk investment strategies, and are increasingly targeting strategies with a lower risk profile.
Core real estate is now the most utilised strategy, employed by 72 per cent of sovereign wealth funds, up from 57 per cent in 2015. Similarly, core plus investments are now sought by 44 per cent of sovereign wealth funds, up from 39 per cent a year ago.
Value added strategies are being targeted by 66 per cent of sovereign wealth funds, down from the 75 per cent that were targeting them last year, and marking a return to levels seen in 2013.
Opportunistic strategies, meanwhile, saw one of the largest decreases in interest, with the proportion of sovereign wealth funds targeting the strategy falling from 71 per cent in 2015 to 59 per cent in 2016. Distressed real estate opportunities are being targeted by just 38 per cent of sovereign wealth funds in 2016, a fall of 23 percentage points from the 61 per cent targeting them a year ago. The proportion of sovereign wealth funds targeting debt strategies fell to 50 per cent, down from 54 per cent, while secondaries (6 per cent) and fund of funds (6 per cent) remained level.
The proportion of sovereign wealth funds investing in real estate rose to 62 per cent in 2016, equalling infrastructure as the asset class most invested in by these funds. This represents an increase in the proportion of SWFs active in real estate from 54 per cent in 2014 and 59 per cent in 2015.
Over half of sovereign wealth funds (58 per cent) target real estate investments globally. The more mature real estate markets of North America and Europe are targeted by 56 per cent of sovereign wealth funds each, while 52 per cent target investments in Asia.
Of all sovereign wealth funds that invest in real estate, 27 per cent each are based in the Middle East and Asia. North America-based funds also account for a large proportion (19 per cent), but just 8 per cent are based in Europe.
All sovereign wealth funds with over USD100 billion in assets under management (AUM) invest in real estate while, in contrast, only half of sovereign wealth funds with assets between USD1 billion and USD10 billion invest in the asset class, dropping to less than a third (30 per cent) for investors with under USD1 billion in AUM.
Eighty-five per cent of sovereign wealth funds seek direct investment in real estate, the most attractive route to market. Two-thirds (67 per cent) of funds invest in the asset class through private real estate funds and 31 per cent access real estate via listed investments.
“Real estate remains a staple element in the portfolios of many sovereign wealth funds, due to its ability to provide risk-adjusted returns and a relatively stable income stream,” says Andrew Moylan, Head of Real Estate Products, Preqin. “This has been increasingly important over the past year with the drop in oil and commodity prices threatening the income of some of these investors, and encouraging them to further diversify their holdings.
“Sovereign wealth funds are known for acquisitions of core ‘trophy’ assets in major markets, and it appears that while competition for core real estate has pushed pricing up for these assets, sovereign funds will continue to focus on assets that will generate reliable income over a long period, rather than seeking to move up the risk/return curve.”