By Tom Leahy on August 31st, 2018
Sovereign wealth funds (SWFs) have been notable so far in 2018 – for their absence, that is. For the year to date these buyers have spent just over $3.6 billion on direct acquisitions of global income-producing real estate, compared with $30.6 billion for all of 2017, and they are net sellers for the first time since 2010. There are various reasons for the pullback.
Political issues are one factor in the change of direction by SWFs. Capital controls by the Chinese government seem to have curtailed outbound activity by the two main Chinese vehicles, CIC and SAFE. The only notable activity by either group this year was SAFE’s sale, with its joint venture partners, of London’s Ropemaker Place for $860 million in June.
A risk is that China’s capital controls may tighten further in the event of a damaging trade war with the U.S., as spending power would be deployed domestically to support the economy. Only logistics property acquisitions may remain immune since these are treated favorably under China’s Belt and Road initiative.
Politics has also played a part in the absence of the QIA from the market. QIA spent more than $25 billion of the country’s natural gas and oil reserves on commercial property between 2014 and 2016. However, in the last 19 months they have spent just $1.2 billion on direct acquisitions. The chief reason for this appears to be the diplomatic crisis that broke out between Qatar and a Saudi-led coalition in 2017. (This has led to large outflows from Qatari banks: the Financial Times has reported the Qatari government had to spend $40 billion of their reserves to prop up their economy in first two months of the dispute.)
A period of low oil prices has also had a negative impact on Qatar’s Gulf neighbors, who have traditionally invested a portion of their billions of oil reserves in commercial real estate. Overall flows from the Middle East are at their lowest since 2011.
Oil prices have revived somewhat and a sustained recovery may spur spending on commercial real estate once more. However, if the reverse happens there is a sizeable amount of global commercial property stock locked up in commodities-driven SWFs that may come to market: more than 8 million square meters (86 million square feet) of offices, 13 million square meters of industrial and 2.5 million square meters of retail space.
Finally, the maturity of the commercial real estate cycle may have put a brake on activity for some. With prime property at historically low yields in many markets, participants may be sitting on their hands to wait for the inevitable correction. Still, SWF capital tends to be long-term in nature – they are big net-buyers of real estate over the last decade – and cyclical pricing movements may not be a concern.
However, with just more than $1 billion of pending deals in the pipeline and little likelihood that the negative political issues will be resolved soon, a substantial pickup in the second half of 2018 does not seem not likely.