The world's commercial property markets are going to see increased investments from sovereign wealth funds (SWFs) in the next few years, especially from the Gulf, according to a new report of the American real estate services giant CB Richard Ellis. It said SWFs will potentially invest around $725 billion in the next seven years in the global commercial property markets. This will be more so in the case of Middle Eastern SWFs, which account for four of the top six commodity-based SWFs in the world with a combined value of $1.74 trillion, according to a CB Richard Ellis statement following the release of the report. SWFs are state-owned investment funds comprising financial assets such as stocks, bonds, property, precious metals or other financial instruments. Among the major SWFs in the Gulf are the Abu Dhabi Investment Authority and Dubai World in the United Arab Emirates (UAE), the Kuwait Investment Authority, the Qatar Investment Authority and the Saudi Arabia Sovereign Wealth Fund. Bahrain's Mumtalakat recently announced that it posted a net income of $651.9 million from the time of its inception in June 2006 to Dec. 31, 2007. “More investment will flow from key Gulf SWFs as a consequence of high inflows of capital,” Nick Maclean, CB Richard Ellis's managing director for Middle East and North Africa (MENA), said. “Typical safe havens will include central London, but other trophy real estate targets will figure such as Abu Dhabi Investment Council's acquisition of New York's Chrysler Building earlier in the year,” he added. According to the report, this trend of investing in commercial property will continue despite the fact that SWFs already hold significant direct commercial real estate investments. “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 seven percent of their total assets,” Ray Torto, CB Richard Ellis's chief global economist, said. “With nearly $4 trillion of total assets currently under SWF control, a seven percent allocation would mean worldwide commercial real estate investments totalling $280 billion,” he said. Putting the figures in perspective, he said that the entire US institutional-grade property portfolio owned or managed by investment managers and plan sponsors is valued at approximately $330 billion. “It has been estimated that the SWFs could reach total assets of $12 trillion by 2015. A seven percent allocation implies SWFs would make approximately $725 billion of net property investments over the next seven years,” Torto said. The report said that although SWF property investments have been largely concentrated in the Middle East and the US, such funds would have to diversify future investment across geographies, sectors and investment vehicles to meet target allocations. “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,” Michael Haddock, director for research in Europe, Middle East and Africa at CB Richard Ellis, said. “Favored future destinations are expected to include Japan, Britain and other countries with currencies that are not held in the (respective) SWFs' foreign reserves,” he said. He, however, added that SWFs would have to look at 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,” Haddock said. Sovereign wealth funds control an estimated $3.85 trillion, a figure that, according to the International Monetary Fund, could expand to between $12 trillion and $15 trillion by 2015. The financial services provider State Street says sovereign wealth funds could collectively own more than 5 percent of the world's major companies by 2013. Already, these funds have provided capital to publicly traded financial concerns including Citigroup, Merrill Lynch, Morgan Stanley, and UBS.
