SWFs Seen Raising Property Investment

Source : The Business Times, September 23, 2008

(SAN FRANCISCO) Sovereign wealth funds may increase investment in commercial properties to a net US$725 billion by 2015 as they diversify their holdings from stocks and bonds, according to CB Richard Ellis Group Inc.

The funds will probably raise the proportion of money they invest in real estate to 7 per cent from 4 per cent in the next seven years, the world's largest commercial-property broker said in a report published yesterday. Abu Dhabi, Norway, Saudi Arabia, Singapore and China have the largest funds, CB Richard Ellis said.

'The attraction of property is that it provides the yield of bonds and the appreciation of stocks,' Ray Torto, Boston-based chief economist for the broker, said. 'In a distressed environment, trophy assets become available.'

Commercial property prices are declining amid scarce financing and a slowing global economy. US real-estate values fell for the fourth straight month in June and are 12 per cent below their October 2007 peak, according to Moody's/REAL Commercial Property Price Indices.

European real-estate stocks have dropped 37 per cent since the end of 2006 and may fall another 10 per cent before recovering next year, JPMorgan Chase & Co analysts said on Sept 3.

As much as half of the property-related investments made by sovereign wealth funds will be on acquisitions of buildings and as much as 30 per cent will be put into private-equity funds and private real-estate investment trusts, the CB Richard Ellis report said. As much as 25 per cent will be invested in real-estate debt.

Until now, the funds have mainly purchased properties in the US and Middle East, according to the report. In future, they will probably spend more in countries with currencies that aren't held in the funds' foreign reserves, the report said.

Japan is attractive because its old buildings need to be replaced, and UK prices have already dropped to levels where the funds are interested in buying, Mr Torto said.

The spread in the US between selling prices and what buyers are willing to pay is still too wide to attract sovereign-fund investment, he said.

'They like big financial capitals,' Mr Torto said of the funds' interest in Tokyo and London.

'The question we've been kicking around is if New York City has tarnished itself badly over the last six months, but New York is resilient.' - Bloomberg