Safe bet? Sovereign funds rethink oncereliable real estate
LONDON - The Covid-19 pandemic has forced sovereign wealth funds to think the previously unthinkable. With prime office blocks lying empty around the world, hotels half-vacant and retailers struggling to stay afloat, the funds are retreating from many of the real estate investments that have long been a mainstay of their strategies.
Sovereign wealth funds (SWFs) invested $4.4 billion in the sector in the first seven months of 2020, 65 percent down from the same period a year ago, according to previously unpublished data provided to Reuters by Global SWF, an industry data specialist.
The nature of property investments is also shifting, with funds increasingly investing in logistics space, such as warehousing, amid a boom in online commerce during the pandemic, while cutting back on deals for offices and retail buildings.
Such shifts in behaviour can have seismic effects on the global real estate market, given such funds are among the largest investors in property and have interests worth hundreds of billions of dollars in total. Three sovereign funds sit within the top 10 largest real estate investors, according to market specialists IPE Real Assets.
A big question is whether the changes are structural for the funds, for which property is an asset-class staple at about eight percent of their total portfolios on average, or a temporary response to a huge, unexpected and unfamiliar global event.
“Real estate is still a big part of sovereign wealth fund portfolios and will continue to be so,” said Diego López, managing director of Global SWF and a former sovereign wealth fund adviser at PwC.
“What Covid has accelerated is the sophistication of SWFs trying to build diversification and resilience into their portfolio - and hence looking for other asset classes and industries.”
Property capital value globally is expected to drop by 14 percent in 2020 before rising by 3.4 percent in 2021, according to commercial real estate services group CBRE. Analysts and academics question whether the pandemic’s impact may prove long-lasting, with more people working from home and shopping online.- Reuters