This past spring, Nakheel, an affiliate of Dubai’s Istithmar, bought a 50% stake in the Fontainebleau Hilton in Miami Beach from Turnberry Associates for a
reported $375 million. The 17-acre resort is currently undergoing a $500-million renovation.
Others, like Maduell, don’t see governments tightening restrictions, particularly on
real estate investments. A set of guidelines
can only be a positive thing and would help
to improve the business climate for SWFs,
adds Langford. “It establishes a set of
ground rules. And because these funds continue to grow at such an exponential rate, by
definition, it will help to increase the
amount of capital they’re deploying, including into real estate,” he explains. “I think the
funds are embracing the guidelines.”
Many of these entities, he notes, have
acknowledged that the concerns over transparency and governance are an issue. He
cites the recent deal in which ADIA paid
$7.5 billion for a 4.9% stake in Citigroup.
“Abu Dhabi officials were very quick to
point out how uninvolved they would be in
Citigroup’s affairs; they would not get a
board seat or have an ongoing say in the
bank’s operations,” says Langford. The
Kuwait Investment Authority, which
invested $3 billion in Citigroup and $2 billion in Merrill Lynch, is also making efforts
to improve its disclosure.
It would benefit the US to establish a
clear set of policy practices, maintains
Langford. “What the US really wants is to
have a good flow of sovereign wealth
investment into its assets and businesses
because there are a number of countries
that are a lot less restrictive,” he explains.
“A country with fewer regulations and a
higher rate of return due to accelerated
GDP growth may be a more appealing
venue. So it’s kind of a balancing act. You
don’t want to turn away the capital, but
you also want to make sure the public
understand there are guidelines established for the investments by these funds.”
It’s unclear what impact the guidelines
will have on how SWFs do business here.
Most experts agree that the US will continue to be a preferred investment target,
though the funds may funnel some capital
out to emerging nations that may have
lower investment barriers, stronger GDP
growth and higher return potential. The
consensus seems to be that with their rapid
growth, SWFs will have so much capital
that they can invest it in several places.
“SWFs are going to search for the highest yields and the best opportunities
throughout the world. I would anticipate
that those wealth funds will probably grow
three to four times larger over the next five
years, so they will be overwhelmed with
capital that needs to be invested,” says
Riggs. He adds that even if the US dollar
strengthens, SWFs won’t shy away. “A
strong dollar means the economy is growing and our economic position in the world
is being restored. There is a tremendous
amount of opportunity here coupled with a
lot of safety, and there are higher relative
returns. There may be emerging markets,
but those markets are very small.”
While SWFs will certainly evaluate a
global pool of possibilities in the long
term, Langford says, the weak dollar and
stagnant investment climate pose a fairly
unique opportunity for them. “The
appeal of the US is that it may be more
stable, it’s a more mature economic cycle
and it’s one of the larger economies of the
world. By buying real estate at a discounted price and holding onto it for the
long term, there’s a significant capital
appreciation opportunity. There will be
more offshore investment in other emerging economies, but there will be a continuation of investment in US commercial
real estate.”
The bottom line is, SWFs are here to
stay, and it would suit US players well to
simply view these vehicles as just another
source of funds. “Purely based on the
amount of capital they have, they can be a
huge force. Similar to a bank or a lending
institution, you have to build a relationship
with them,” says Langford. “The extent to
which they’re going to continue to invest in
commercial real estate remains to be seen.
I expect it will be very robust. And those
participants in the segment who actually go
out of their way to build relationships with
certain SWFs will end up being significantly ahead of the rest of the pack.”
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