Sovereign Wealth Funds (SWFs) are expected to become one of the most significant investors in the world’s commercial property markets, potentially investing as much as US$725 billion over the next seven years, according to a new global report from commercial property consultants CB Richard Ellis Group. CBRE Ireland has urged the Irish Government to cut the 9% commercial property stamp duty rate to encourage investment. The maximum UK stamp duty rate is 4%.
Although more than half of the SWFs are believed to already hold direct commercial real estate investments, allocations to the sector are expected to rise substantially. The potential impact on the global real estate market is significant.
Ray Torto, Chief Global Economist at CB Richard Ellis, said:“Given that the real estate sector’s investment characteristics – current income combined with long-term appreciation -- closely match SWF requirements, we expect them to increase their weighting of commercial property to approximately 7% of their total assets. With nearly US$4 trillion of total assets currently under SWF control, a 7% allocation would mean worldwide commercial real estate investments totaling US$280 billion. To put this number in context, the entire U.S. institutional-grade property portfolio owned or managed by investment managers and plan sponsors is valued at approximately US$330 billion today.”
Torto continued: “Looking to the longer term, the SWFs’ potential for future property investment is even more significant. It has been estimated that the SWFs could reach total assets of US$12 trillion by 2015. A 7% allocation implies SWFs would make approximately US$725 billion3 of net property investments over the next seven years.”
The influence of SWFs is expected to be felt across the world. In order to achieve target allocations, SWFs will need to diversify future investment widely across geographies, sectors and investment vehicles. Thus far, SWF property investments have been largely concentrated in the U.S. and the Middle East.
“Although SWFs are likely to continue to focus on core real estate product in major markets, they will have to put capital to work in new geographies and emerging sectors. Favored future destinations are expected to include Japan, the U.K. and other countries with currencies that are not held in the SWF’s foreign reserves,” said Michael Haddock, Director EMEA Research, CB Richard Ellis.
Haddock continued:“However, SWFs will have to look to both the indirect investment market and the debt market to fully meet their objectives in the real estate sector. It is also very possible that we will see outright acquisitions of property companies – listed and unlisted – as a way of assembling a significant direct real estate portfolio rapidly as well as acquiring the property management infrastructure to go with it.”
Based on the SWFs’ existing approach to, and established investment profile in real estate as well as the experience of other major real estate investors, CB Richard Ellis estimates that the SWFs’ projected new investment is likely to be distributed as follows:
“Direct investment is expected to continue to make up the largest portion of the SWFs’ real estate exposure, but as they venture into more locations and more sectors, they will increasingly follow alternate routes into these markets. In particular, unlisted property funds will attract a growing proportion of the SWFs’ real estate allocations,” said Haddock.
The SWFs’ increased investment in real estate may help stimulate a recovery in the secondary market for real estate debt. The dislocations within the debt market may provide attractive investment opportunities for equity-rich SWFs with long-term investment horizons.
Marie Hunt, Director of Research at CB Richard Ellis in Dublin said: “The SWFs have made a number of opportunistic real estate investments in several markets and we expect this trend to continue. However, the SWFs are patient investors who are very well advised and the expansion of their real estate portfolios and entry into certain markets will be deliberate and measured. However, with a rate of stamp duty of 9% applying in Ireland, unfortunately these funds will not consider investing in the Irish commercial property sector. We urge the Government to consider reducing this rate in the forthcoming Budget. ”
