June 27, 2008 / 10:55 AM / 11 years ago

Sovereign property investors rich but realistic

LONDON (Reuters) - Sovereign wealth funds have ramped up their surveillance of European property but will not be hurried into spending and their long-term impact on the sector is unpredictable, however many billions they have earmarked to invest.

Cranes fill the skyline at a construction site for new apartment blocks outside Madrid August 2, 2007. REUTERS/Susana Vera

Speaking at the Reuters Global Real Estate Summit this week, some of the world’s leading property experts exploded several myths surrounding sovereign funds and their ideal investment strategies.

They warned capital-starved property markets that any eagerly anticipated investment spree by state-sponsored investment vehicles from Asia, the Middle East, and elsewhere was likely to arrive later rather than sooner.

“There seems to be a lot more interest in the UK but the problem is no-one likes to buy an asset that looks cheaper in six months time, even if you see fundamental value,” said James Brent, global head of real estate investment banking at Citigroup Inc (C.N).

“That is what is happening with the sovereign wealth funds. They are spending a lot of time looking ... but what they won’t do is invest at the wrong stage in the cycle. They are very sensitive about not being caught out,” he said.

Global sovereign funds, swelled by oil revenues and foreign currency reserves, hold assets of between $1.9 trillion and $2.9 trillion, the U.S. Treasury estimates.

Analysts forecast that could rise to $15 trillion in the next eight years.

After financial institutions, real estate has been the second most popular sector for sovereign investments, accounting for 11 percent of investment allocations in 2007 and 2008 so far, according to Lehman Brothers.

While some see sovereign wealth funds as vulture or quasi-private equity investors, Chuck Leitner, global head of Deutsche Bank’s (DBKGn.DE) alternatives investment arm RREEF, said the funds more closely resembled institutional investors.

Explaining why sovereign funds had swooped on few British property deals so far despite an 18 percent slide in values since last summer’s peak, Leitner said the sovereign funds fully understood their advantages over other players and were acting in a “measured” way.

Their most significant transactions this year include the 400 million pound ($789.6 million) purchase of British Land’s (BLND.L) Willis Building in London’s City financial district by an investment arm of Kuwait and the 2.3 billion dirham ($627 million) acquisition of London’s ExCel conference centre by the Gulf emirate of Abu Dhabi.

“They do feel like they will be in a very strong position with capital they are able to invest, in a market that probably needs capital more than it did a year ago,” Leitner said.

“I haven’t seen any of these guys simply go out there and react and do things that do not have a lot of thought and strategy behind them.”

INVESTMENT STRATEGY

Robert Houston, who heads ING Real Estate’s UK business, said sovereign investors were not all obsessed with getting trophy assets, though many who succeeded could well lock them away from the market indefinitely.

“I think that the era of trophy assets and sovereign funds went 10 years ago,” Houston said.

“They still buy them but the smart ones are about making money,” he said, referring to a joint venture ING Real Estate had set up with an unnamed sovereign wealth fund to invest an initial 100 million pounds of equity in higher risk, higher reward property assets.

Houston also said that sovereign funds were not simply eyeing a fast buck from distressed property markets.

He described three different strategies pursued by three of ING Real Estate’s sovereign wealth fund clients.

One client adhered to a “buy, sell, make your money, and go away” proposition, while another said they were looking for cheap deals to hold long-term, and a third said he wanted prize buildings at any price.

“They are realistic to know that something could come up in the next month, but more likely over the next 12 to 18 months,” said Houston.

Experts at the summit agreed sovereign fund pockets were deep and getting deeper but they blasted a popular misconception that funds would merely prop up wounded or illiquid markets.

“The interrogation you get with sovereign wealth funds is exactly the same as what you might get from the Blackstones’ or the MSREFs,” said Brent.

“Anyone who claims that sovereign wealth money is ‘dumb money’ is totally, totally wrong,” he said.

(For summit blog: summitnotebook.reuters.com/)

(Additional reporting by Eleanor Wason and William Kemble-Diaz; Editing by Jason Neely)

See www.reutersrealestate.com for the global service for real estate professionals from Reuters

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