Sovereign wealth and pension funds expanded their allocations to real estate in 2020 more than to any other type of alternative asset. They also closed the highest number of deals in the sector, compared to other industries such as technology and infrastructure.
According to Preqin data, among alternatives assets, sovereign wealth funds allocated an average $3.84 billion to real estate, a 10.3% increase from last year. Meanwhile, their allocations to hedge funds, private equity and infrastructure showed relatively smaller increases of between 1.5% and 2.9%.
Separately, based on Global SWF data, both SWF and pension funds completed more deals in real estate last year than in any other sector [see table below]. Real estate topped the table with 103 deals completed in 2020, compared to 82 the year before, although the total value of investments slipped 14% due to a decrease in the average size of investments.
DEALS DONE BY SOVEREIGN WEALTH AND PENSION FUNDS
Source: Global SWF
Some of the largest deals took place in Asia, including National Pension Fund’s $1.2 billion commitment to Allianz RE Asia-Pacific Core I fund, GIC’s $1.1 billion acquisition of Twin Towers in Beijing and QIA’s $1 billion purchase of Istinye Park Mall in Istanbul, according to Diego Lopez, the managing director of Global SWF. Korea's National Pension Service (NPS) has been increasing its real estate investments in recent years as part of a plan to raise its allocation to alternatives from 11.4% of total assets in 2019 to 15% by 2023 to diversify risk.
Notably, based on Real Capital Analytics data, GIC, Allianz and AXA Group were among the top 10 buyers of real estate assets in the first three quarters of 2020.
Experts told AsianInvestor that SWFs and pension funds’ real estate appetite remains strong so far this year.
“We continue to see both pension funds and sovereign wealth funds actively investing in the real estate market. Many pension funds are continuing to value diversification and allocate capital to core diversified funds, as well as more thematic investments via closed-end funds, clubs and JVs,” said Ben Aiken, a real estate portfolio manager at JP Morgan Asset Management in Asia Pacific.
Shawn Khazzam, head of alternatives distribution at JP Morgan Asset Management, however, observed that “SWFs appear to favour more direct and concentrated exposure based on the market opportunity”. Both declined to name the institutions. The firm's global assets under management across all alternatives are $150 billion as of 30 September 2020.
Whatever the approach, many of these institutions are targeting Asia. Allianz Real Estate, the property investment arm of German insurer Allianz, is opening branches in mainland China and Japan as part of its major expansion drive in Asia. The property investment arm of Ontario Municipal Employees’ Retirement System (Omers) told AsianInvestor in September last year that it intends to relocate its Asia Pacific head to Singapore and expand its five-strong team in the city-state to increase its real estate allocation to the region.
“A number of global investors find themselves underweight in the Asia Pacific and are becoming more active in this market, particularly as they have seen relative stability and a faster economic recovery than in other regions through the pandemic,” said Aiken.
With the office market likely to come under pressure as the work-from-home trend continues post-pandemic, the asset focus of sovereign wealth funds and pension funds has centred on logistics and industrial assets.
“The investment opportunity for long-term investors is broader in the logistics/industrial sector at the current time, with attractive opportunities in mature markets such as Japan and Australia, and higher-growth markets such as China,” Aiken said.
Lopez has similar views. “We expect funds to pivot towards logistics and away from offices in anticipation of a potentially permanent change in working culture,” he said.
Indeed, industrial sector transaction activity has held up best globally on the back of strong demand for distribution warehouses by third-party logistics operators and retailers, fuelled by e-commerce trade. According to Real Capital Analytics, transaction volumes for industrial properties fell just 10% year-on-year in the nine months between January and the end of September. By comparison, office transaction volume was down 36%, and retail deals fell by 39%.
“Investments into high-quality logistics or industrial properties in the past 12 months would have realised healthy gains, with positive net effective rental growth and firming capitalisation rates across the majority of markets,” said Aiken.