SWFs advised to adjust real estate investment strategies

Sovereign wealth funds have to change their investment strategies if they want to capture opportunities and maximise returns. They need to be more adventurous and look beyond traditional Tier 1 locations like London where product is scarce, competition is intense and prices are high.

This is the view of Joe Valente, head of research for European real estate at JPMorgan Asset Management in London. London offers transparency and liquidity but the market has become expensive and too competitive, and capital values are back where they were before the crisis in 2007.

‘Once SWFs were the most important source of capital in central London, but now they are just one player among many, in fact European institutions have become the most important player,’ he said.

European institutions, driven by the need for rationalisation, accounted for 279 acquisitions last year, followed by REITs with 131, non-European institutions with 108 and global funds with 96. SWFs rank fifth with 40 acquisitions.

‘The best risk-adjusted returns are to be found where capital is most scarce,’ said Valente. ‘Mispriced core, grade B Tier 1 locations, the many markets that have been starved of capital. SWFs should start looking at secondary markets like Manchester or Cologne.’ Deals would have to be smaller and there would be no trophy tag, but ‘sign less large cheques, that is where the rewards lie’.

Other strategies are more risky: ‘At this point of the cycle many investors are seeking to get rid of the less attractive assets because there is a market for them, but buying a big portfolio can be a big bet,’ said Valente, who before joining JPMorgan five years ago was head of real estate research at Allianz. ‘A lot of distressed assets are coming out because it is a great time for them to do so, given the weight of capital, but this does not mean buying them is a good investment.’

Some SWFs are already going down this route while some will be reluctant as there are great differences between them, he pointed out: some have been investing in real estate in Europe for 50 years and some, for example the African or Latin American ones, have only come on to the scene in the last 18 months or less. ‘All are comfortable investing in London, but not many can say the same about investing in Madrid or Stockholm,’ he said. ‘But is true to say that all SWFs have similar objectives and they are all long-term investors.’