Sovereign wealth funds are set to become more influential real estate investors, according to research by Preqin.
Research for the firm’s sovereign wealth fund review found that 84% of SWFs were below their target allocations to the asset class.
Preqin cited potential for “significant inflows into real estate” as SWFs invest more towards their strategic targets and seek more globally diversified portfolios.
Andrew Moylan, Preqin’s head of real assets products, said: “Their large assets under management make SWFs increasingly important sources of capital for the real estate asset class.”
Moylan said that while SWFs typically “make the headlines” for direct acquisitions of trophy assets in global hubs, indirect routes to the real estate market are also used.
“As they grow their real estate allocations, it is likely there will be further diversification to these investors’ portfolios,” Moylan said.
“As they have moved to diversify their portfolios and acquire assets that help them meet their long-term objectives, alternative assets – and particularly real estate – have emerged as an increasingly important part of portfolios.”
The firm found that 45% of sovereign wealth funds currently invest less than 5% of their total assets in real estate.
Preqin said all sovereign wealth funds globally had a target allocation of at least 5% or more to real estate, with 43% having a target allocation to the asset class of 10% or more of their total assets.
The firm said that 59% of sovereign wealth funds worldwide actively invested in real estate, up from 54% in 2013.
Infrastructure, SWFs’ preferred alternative asset class is only 1 percentage point ahead of real estate.
Almost two-thirds (64%) look to invest through private real estate fund investments, compared with 86% that seek direct investments in real estate assets, Preqin said.
When investing through funds, value-added strategies are the most frequently targeted, with 75% of sovereign wealth funds looking to make investments in these funds.
Opportunistic funds are targeted by 71% of SWFs.
North America is the most targeted region by SWFs investing in real estate, with 59% preferring the region.