x Abu Dhabi, UAETuesday 16 January 2018

Record property investment by sovereign funds

Sovereign wealth funds, including those in the Middle East, ploughed almost US$10 billion into property investments last year.

Sovereign wealth funds sunk a record portion of their investments into property last year as trophy assets in London, Paris and Moscow proved more attractive than low-yielding bonds or choppy stocks.

The funds made 38 property investments valued at nearly US$10 billion (Dh36.7bn) during the year, according to data released yesterday by the Sovereign Investments Lab at Bocconi University in Milan, which has tracked sovereign fund investment since 1985. While the size of the investment was smaller than the $13.4bn invested the previous year, last year's deals represented 21 per cent of total investments, the highest percentage on record.

"I can also confirm the increasing trend of acquisition in real estate relative to previous years, which is driven by the new opportunities offered to investors in an environment with increasing inflation expectations," said Bernardo Bortolotti, the director of the Sovereign Investment Lab.

Funds from the Middle East have been among the most active in the property market in recent times. Underlining the trend, the Kuwait Investment Authority this week agreed a $600bn deal to buy an office in Canada Square in London's Canary Wharf, occupied by both Credit Suisse and Bank of America Merrill Lynch.

It follows a string of investments by Qatari government-backed buyers in eye-catching buildings including London's the Shard, which will be Europe's tallest building when finished, and major swathes of Canary Wharf, the UK capital's financial district.

"It's searching for a yield and bricks and mortar represent a nice, easy step away from traditional investments like stocks and bonds and one that is an actual tangible asset," said Victoria Barbary, the director of the London-based Sovereign Wealth Centre. "There's also a case of trying to buy at the bottom of the market as there's been an awful lot of office buying as valuations went down."

Commercial property in European business centres such as London, Paris and Berlin has emerged as a perceived haven from the recent turmoil ripping through those cities' financial markets.

While property is also viewed as offering better returns than the other perceived safe bet of US treasury bonds. Benchmark 10-year treasury note yields averaged 1.79 per cent last year, below the five-year average of 2.9 per cent. It also falls short of prime office property net yields of 4.6 per cent in New York, 4 per cent in London's West End and 3.75 per cent in Zurich, according to a global property outlook from Credit Suisse Global Real Estate Research, released in December.

Loose monetary policy by central banks in Europe and the United States has kept interest rates low, making it harder to make a return in bond markets. Last year, equities in developed markets were rocked by concerns about the euro zone crisis and the US fiscal cliff negotiations.