Sovereign wealth funds are moving out of their traditional comfort zone for real estate and infrastructure investments, according to JP Morgan Asset Management’s global head of sovereigns.
With increased competition for high quality assets in major markets like London and New York, SWFs are considering investing outside core real estate, says Patrick Thomson.
Recent research by Preqin found that funds offering an opportunistic strategy are targeted by 71% of SWFs.
“Real estate remains popular – offering excess spreads, inflation protection and stable yields,” Thomson said. “SWFs are considering more opportunistic sectors, such as shopping malls and development projects, as well as looking in more peripheral markets.
“There’s certainly less appetite for the very hotly pursued core assets of, say, central London.”
While the likes of Norway’s Government Pension Fund Global (NBIM) continue to invest in London, recent months have seen SWFs buy in cities considered higher up the risk curve.
Qatar Investment Authority’s purchase of the largest development in Milan, Hines’ 290,000 sqm Porta Nuova scheme, is one example. The SWF took a 40% stake in 2013 before buying the remainder this year, suggesting increased confidence in Italy.
While geographical diversity is an obvious consequence of the high prices SWFs now face in major global cities, the move beyond the core may require greater resources and expertise.
But Thomson says SWFs have evolved with the market and have already attracted “private-sector talent”.
“It’s worth noting the rapid growth in overseas offices set up by SWFs in order to capture investment opportunities,” Thomson says, pointing to the fact that two sovereign funds from Southeast Asia have 11 and nine overseas offices respectively.
“They’re typically staffed with specialist investment professionals,” Thomson says.
Efforts to increase transparency among SWFs has seen a rise in the publication of annual reports, Thomson says. The more transparent the SWF, the likelier it will be considered professional and consequently a worthy bidder, particularly when investing in infrastructure.
That mindset may have its roots in the Dubai Ports World controversy of 2006, when US congress members blocked the sale of six ports to the United Arab Emirates-owned firm, citing security issues.
Around the same time, the European Commission proposed a “common EU approach” to SWFs.
The Commission noted that, while SWFs benefited the global capital market and provided funding for global investment, it was concerned about “accumulated current account imbalances, the intentions behind SWFs’ investments, transparency and good governance”.
The Commission said: “The right approach is to promote a cooperative effort between recipient countries and SWFs and their sponsor countries to establish a set of principles ensuring the transparency, predictability and accountability of SWFs investments.”
It is entirely feasible for an individual in 24 hours to use a wide range of utilities, infrastructure and services all part-owned by SWFs – but the journey to such far-reaching ownership has been relatively short, says Thomson.
Less than seven years ago, the International Working Group of Sovereign Wealth Funds (IWG), made up of SWFs and government representatives of 23 countries and now chaired by Australia’s Future Fund’s David Murray, agreed to a set of 24 principles. ADIA, Singapore’s GIC, QIA and UAE were among those who signed the agreement, known as the Santiago Principles and implemented in 2010.
The principles were a first step towards a new environment for global investment. Since then, the focus has been on the implementation, with annual reporting just one example.
Almost a decade from the Dubai Worlds debacle, investment in infrastructure by Middle-Eastern SWFs continues to grow and, as Thomson points out, the rewards for such efforts are within reach, notably in the US where the country’s infrastructure is now in need of significant investment.
Preqin notes that SWF interest in investing in international infrastructure continues to grow, with growing demand for capital to finance long-term projects.