Undeterred by Grim Conditions, Sovereign Wealth Funds Eye U.S. Real Estate

The U.S. commercial real estate market, plagued by high vacancies and declining property values, is not at its most appealing right now, but according to a new report by Deloitte, sovereign wealth funds are beginning to see a great opportunity for investment.Entitled Sovereign Wealth Funds: Real Estate Partners in Growth?, the report concludes that for SWFs, the acquisition of commercial real estate in the U.S. today has its benefits, including the opportunity to circumvent currency depreciation and take advantage of capital appreciation upon a turnaround of the market. For a bevy of other reasons, SWFs, government entities charged with investing a nation’s surplus wealth, are becoming increasingly interested in the U.S. market, despite the global financial meltdown. “Notwithstanding the broader macroeconomic issues, SWFs look at commercial real estate in a couple of different ways,” Guy Langford (pictured), Deloitte’s head of U.S. Real Estate Mergers and Acquisitions, told CPN. “It is a great vehicle to get exposure to quality assets in particular geographies, and deploy capital without the same degree of scrutiny or volatility that some investments might have. Lots have invested in the financial sector and lots have not fared well.” Presently, an average 5 to 10 percent of an SWF portfolio focuses on real estate. “Now, a lot of them are reevaluating,” Langford said. Most SWFs looking at the U.S. are focusing on either whole or partnership acquisitions of high quality assets in premier markets for long-term hold. “They offer cash flow and appreciation over time,” Langford noted. “There are certain inherent attributes in commercial real estate that will be appealing over the long-term for in an investment portfolio.” Office and hospitality assets appear to be the most coveted. “The appeal: office real estate typically has longer term leases, so there’s a little more stability, and hotels in gateway cities where there is a limited supply of high-quality product are still in demand.” While the interest in U.S. real estate among SWFs is picking up, there has not been a flood of acquisition activity just yet. “Like many real estate investors right now, a lot of [SWFs] are waiting on the sidelines,” Langford said. “Some are rebalancing their portfolios or have their own national issues to deal with, but when there is a clear decline in commercial real estate values, there’s going to be great opportunity. SWFs will be a participant in the recapitalization of a lot of different assets in the U.S.” A significant uptick in transactions is on the horizon, he said. “Expect more. Like with other real estate entities, there will be a lot of activity later in the year.”