A new buyer class is emerging in CRE

Sovereign Wealth Funds (SWFs) are expected to become one of the most significant investors in the world’s commercial property markets, potentially investing as much as $725 billion during the next seven years, according to a new global report from CB Richard Ellis Group Inc.

Although more than half of the SWFs are believed to already hold direct commercial real estate investments, allocations to the sector are expected to rise substantially. The potential impact on the global real estate market is significant.

“With nearly $4 trillion of total assets currently under SWF control, a 7% allocation would mean worldwide commercial real estate investments totaling $280 billion,” said Ray Torto, chief global economist at CB Richard Ellis. “To put this number in context, the entire U.S. institutional-grade property portfolio owned or managed by investment managers and plan sponsors is valued at approximately $330 billion today.”

“Looking to the longer term, the SWFs’ potential for future property investment is even more significant. It has been estimated that the SWFs could reach total assets of $12 trillion by 2015,” Torto added. “A 7% allocation implies SWFs would make approximately $725 billion of net property investments over the next seven years.”

The influence of SWFs should be felt across the world. In order to achieve target allocations, SWFs will need to diversify future investment widely across geographies, sectors and investment vehicles. Thus far, SWF property investments have been largely concentrated in the U.S. and the Middle East.

“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. Favored future destinations are expected to include Japan, the U.K. and other countries with currencies that are not held in the SWF’s foreign reserves,” said Michael Haddock, director EMEA research at CB Richard Ellis.

“However, SWFs will have to look to both the indirect investment market and the debt market to fully meet their objectives in the real estate sector,” Haddock added. 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.”

Based on the SWFs’ existing approach to, and established investment profile in real estate as well as the experience of other major real estate investors, CB Richard Ellis estimates that the SWFs’ projected new investment is likely to be distributed as follows:

“Direct investment is expected to continue to make up the largest portion of the SWFs’ real estate exposure, but as they venture into more locations and more sectors, they will increasingly follow alternate routes into these markets. In particular, unlisted property funds will attract a growing proportion of the SWFs’ real estate allocations,” Haddock said.

….Source Co-Star http://www.costar.com/News/Article.aspx?id=98DBFFA0C1EE3BCC5F0253B04DB438F3#num4