Regional sovereign wealth funds look to invest in real estate for liquidity

Middle Eastern sovereign wealth funds are targeting real estate investments to generate yields in the low interest-rate environment and own a liquid asset as withdrawals continue, according to investment management firm Invesco.

More funds were looking at real estate for its yield-generating qualities for two reasons, said Alexander Millar, Invesco’s head of Emea sovereigns at yesterday’s launch of the firm’s annual Global Sovereign Asset Management Study in Dubai.

Low interest rates in many parts of the world mean that fixed-income products are not generating significant returns, and many sovereign funds have experienced their own reduction in liquidity as withdrawals have remained stable and the amount of new investment has been shrinking. In such a scenario, real estate investments are a more liquid form of income-generating asset than either private equity or infrastructure investments.

Mr Millar said that there is also growing interest in infrastructure investment, despite it taking sovereign funds much longer to invest in these – four years, on average.

“There’s an awful lot of attractive characteristics to infrastructure investment – long term, illiquidity premium and long duration cash flows – everything a sovereign investor should be looking at,” he said. “But I think what they’ve discovered is getting from those theoretical characteristics to harvesting them into your portfolio in the real world has been very difficult to do.”

He said that this was due to a “lack of supply” of big infrastructure projects, and the weight of money chasing them meant that “a lot of these things have been bid up”.

“Those that are out there have been quite expensive,” he said.

The need for more investment in the US’s underfunded infrastructure sector – and the noises from the Donald Trump administration indicating that it will be receptive to private investment – meant more funds see potential in the sector. Just last month, for instance, Saudi Arabia’s Public Investment Fund pumped US$20 billion into a new $40bn US infrastructure fund being managed by Blackstone.

Meanwhile, the turmoil that took place both politically and economically last year led many sovereign wealth funds to miss their return targets, prompting them to reassess operations in a bid to plug an ongoing “return gap”.

The slowdown in returns meant that sovereign wealth funds are looking at their own business models rather than chasing riskier assets, reducing the amount of intermediaries used and internalising control of investment decisions, according to Mr Millar.

For its report, Invesco interviewed 97 sovereign investors and central bank reserve managers representing $12tn worth of assets. A sample of 57 sovereign funds found that they achieved average returns of 4.1 per cent last year, against a target of 6.1 per cent.

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