By Michael Pralle
Sovereign Wealth Funds Still Strong
Despite Global Economic Downturn
AS WE ENTER 2009, THE OVERALL US ECONOMY
continues to struggle and there are no signs of liquidity returning to the commercial real estate market anytime soon. The duration and severity of the crisis has
exceeded most expectations, leading the International
Monetary Fund to describe it as “the largest financial
shock since the Great Depression.”
Despite the current turmoil, one body of investors—
sovereign wealth funds—are quite active in the commercial property markets around the world. These state-owned investment vehicles are composed of financial
assets such as stocks, bonds, property, precious metals
or other financial instruments.
According to a recent CB Richard Ellis report, SWFs
could invest as much as $725 billion in global property
SWFs could invest as much as $725 billion
in global property assets over the next
assets over the next seven years. The report notes more
than half of SWFs are believed to already hold direct
commercial real estate investments, and allocations to
the sector are expected to rise substantially. Commercial
real estate’s investment characteristics—current income
combined with long-term appreciation—are very much in
line with SWF requirements.
The Abu Dhabi Investment Authority, said to be the
world’s largest sovereign fund, is reportedly planning to
allocate up to 27% of its funds in alternative investments
such as real estate, hedge funds and private equity.
Back in July, the Abu Dhabi Investment Council, the sister fund of ADIA, purchased a 75% stake in the Chrysler
Building in Manhattan for approximately $800 million.
In today’s market, there are major disconnects
between the price of many real estate assets and their
fundamental value. Nevertheless, real estate remains an
established and highly respected investment vehicle.
The actual allocation to real estate will depend on
the long-term objectives of the portfolios and their beneficiaries. For SWFs who are first-time investors in real
estate, a conservative choice is to invest through real
estate investment trusts. REITs offer greater liquidity and
are more highly regulated than other forms of property
The more active end of the spectrum is direct
investing. For the SWF with in-house talent capable of
evaluating assets, negotiating a fair price and overseeing a local property manager, direct investing may make
sense. But the infrastructure required—both human and
technological—makes this route highly impractical for all
but the largest and most experienced investors.
Between passive investing in REITs, and direct investing, lies a third alternative—investing with an experienced
private equity partner may be the most appropriate solution. The right one can add value through long-term real
estate experience, knowledge of local market conditions
and a network of trusted operating partners.
Real estate investing alongside a proven partner often
has other, non-financial advantages. The same economic disturbances that create market mis-pricings and
investment opportunities also tend to produce a great
deal of political anxiety in countries worldwide. Political
concerns are naturally focused on investments in areas
with strategic or national security implications. Results
can take the form of protectionism, including higher
tariffs and taxes, calls for increased disclosure or more
stringent requirements that apply specifically to foreign
investors. Commercial real estate, being non-strategic
and ubiquitous across multiple countries, sidesteps
these concerns—giving it a definite advantage over
many stock investments. A global private equity real
estate investment firm offers geographic diversity.
CBRE’s report anticipates the influence of SWFs will
be felt worldwide, with direct investment comprising
the largest portion of the investors’ real estate exposure. As SWFs seek out more locations and sectors,
alternate routes into various global property markets
will follow. ◆
The views expressed in this article are those of the
author and not those of REAL ESTATE FORUM.
Michael Pralle is the president, chief operating officer and chief
investment officer of J.E. Robert Cos. in Oakbrook Terrace, IL.
He may be contacted at email@example.com.
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