SWFs have grown massively in recent years and are a huge force in today's investment markets. Graeme Newell examines their significance, activities and challenges
According to the Sovereign Wealth Fund Institute, current estimates (September 2010) put SWF assets at $4trn (€2.9trn), up from $1trn in 2001. Commodities-based SWFs account for 60% of SWF assets, while non-commodities-based SWFs account for 40%. Leading SWFs include Abu Dhabi Investment Authority (ADIA) ($627bn), Norway's Government Pension Fund ($471bn), China Investment Corporation ($332bn), Singapore's Government Investment Corporation ($248bn), Kuwait Investment Authority ($203bn), Singapore's second SWF - Temasek ($133bn), Qatar Investment Authority ($65bn), Australian Future Fund ($59bn) and Korea Investment Corporation ($30bn). SWFs account for about 4% of global assets under management, well below pension fund and mutual fund assets.
SWF transparency and disclosure has improved. However, full details are often not provided regarding their total assets, asset allocation and detailed investment strategy. Having played a positive role during the financial crisis, the significance of property in SWFs is highlighted here.
SWF activity and trends
Since 2005, SWFs have made over $360bn (€265bn) in equity transactions. The global financial crisis had a significant impact, in the first half of 2009 SWFs were cautious. However, they increased activity in the second half of 2009 and the first half of 2010. This includes recent increased activity in the financial sector, as well as a return to the OECD markets and an increased appetite for international investment. Just $11bn was invested in the first half of 2009, compared with $58bn in the second half of 2009 and $22bn in the first half of 2010. The $69bn invested in 2009 compares with the peak of SWF activity of $109bn in 2008.
In these SWF transactions, property has always figured prominently. Since 2000, property has accounted for 18% (by number of transactions) and 19% (by value of transactions). In 2009-10 SWFs were cautious, with only $6bn transacted in property in 2009, compared with $10bn in 2008. Property is still 10% of recent SWF activity (the fourth most important sector), exceeded by financials (27%), infrastructure (18%) and energy (11%).
SWF property activity
According to Preqin, 51% of SWFs invest in property, with the larger funds dominating. Those not investing in property tend to be the more recent and smaller SWFs, which are still formulating their investment strategy for alternative assets, as well as more conservative SWFs focused on stocks and bonds only.
Several SWFs, including GIC, ADIA and Temasek, have significant property portfolios. SWF strategies for property investment are sophisticated, covering all aspects of the property sector both locally and internationally. This includes direct property, separate accounts, REITs, joint ventures, co-investment with other SWFs or pension funds, private equity funds, equity stakes in property companies/REITs, debt financing and capital commitments for property development.
In recent years SWFs have been the major property investors globally. In 2009 ADIA participated in the second-largest global property transaction (via a joint venture). The Qatar Investment Authority has been active in property investment in 2009-10.
The following sections highlight the role of property in a number of SWFs.
Property accounts for 5-10% of the ADIA portfolio, using a diversified portfolio of global property assets through direct investments and the use of external funds. The primary focus is to invest directly in assets through joint -ventures with experienced local partners or through external managers closely directed by ADIA's in-house property team. The recent appointments of Bill Schwab (global property) and Tom Arnold (US property) have added considerable in-house property expertise. The approximate split for property is direct (65%), private equity (30%) and listed (5%). Major property acquisitions include the Chrysler Building in New York in June 2008.
GIC was established in 1981 and became a long-term property investor in 1982. GIC Real Estate is one of the three asset management companies within GIC. Property accounts for 9% of the GIC portfolio and resides in the alternative asset allocation. GIC is one of the top 10 property investors globally. The property portfolio comprises over 200 major properties in more than 30 countries.
GIC's property investments include direct property, indirect property, joint ventures, debt financing and private equity. GIC has significant stakes in leading property companies/REITs globally, including British Land and GPT. Recent acquisitions include the Prologis Japan/China industrial property platform ($1.3bn), as well as acquisitions in Tokyo, Stockholm, London, Finland and Italy. Often these acquisitions are with with local players or pension funds, such as Canada Pension Plan Investment Board.
As the second Singapore SWF, Temasek focuses on Singapore and Asia; particularly the emerging economies. Assets comprise listed entities (79%) and unlisted entities (21%). Temasek is one of the most transparent SWFs, producing an informative annual report. Property accounts for 7% of the Temasek portfolio. Via indirect property, Temasek has major stakes in Capita-Land (40%) and Mapletree (100%).
China Investment Corporation
CIC was established in September 2007 with $200bn from China's foreign exchange reserves, with the objective of maximising risk-adjusted returns and diversifying China's foreign exchange holdings. To provide diversification, CIC reorganised its investment departments in April 2009 into public markets, tactical investments, private markets and special investments. Alternative investments, which include property, account for 6% of the portfolio.
A mixed investment strategy is used for property investment comprising direct, separate accounts, private equity funds and debt financing, with an opportunistic property focus. Specific property investments include debt finance for Goodman and Songbird Estates ($1.6bn).
Other SWF property activities
The Qatar Investment Authority has been very active in property recently. This includes major property acquisitions in London, such as -Harrods for $2.2bn, Chelsea Barracks for $1.9bn and the GM Building in New York for $2.8bn, with four joint venture partners. Property development has also been a key SWF activity, particularly as a means to supply the economic infrastructure for their local markets. SWFs such as Mubadala of Abu Dhabi have been active in this area, often in a joint venture with other major property players or other SWFs.
SWFs are an important part of the global financial and investment markets, using a range of sophisticated investment strategies in developing their portfolios. This includes property investment in its various forms across the property space. Key issues concerning the future development of SWFs include:
• Need for increased transparency and accountability. This includes increased use of annual reports, improved websites, increased disclosure of their investment strategies;
• Balancing of local and international investment agendas;
• Developing more effective risk management strategies in the areas of:
- Organisational structure: includes reviewing asset management departments; appointing investment experts; improving information flows;
- Investment strategies: includes co-investment/collaboration with other player for risk sharing;
- Governance: includes a more active role via board of director positions in companies in which they have a major stake;
• The increased use of debt finance. Several SWFs have made significant recent bond issues, eg, Temasek, Mubadala, Khazanah (Malaysia).
To conclude, SWFs will have an important future role in property investment using a diversity of property investment products, as well as implementing long-term investment strategies and contributing to the economic development of global emerging markets.
Graham Newell is professor of property investment, University of Western Sydney
Monitor (2010), Back on Course: SWF Activity in 2009. Monitor.
Monitor (2010), SWF Investment Behaviour: January - June 2010. Monitor.
Preqin (2010), Sovereign Wealth Funds Review. Preqin.
Sovereign Wealth Fund Institute (2010), Sovereign Wealth Fund Profiles. SWFI (www.swfinstitute.org).