Wealth funds become aggressive

Oil rich Governments who have created secretive wealth funds are investing in property and could help the market recover, industry analysts believe. With trillions of petrodollars to spend they are buying into shopping centres, property funds, hotels, offices, development companies and the residential sector.

Sooner rather than later these Sovereign Wealth Funds, as they are called, are going to have substantial stakes in property markets, particularly in the UK and US if analysts are to be believed.

Sovereign Wealth Funds, state owned investments, are already investing in real estate a bit like they have with troubled financial institutions in the last 12 months. The downward spiral in property, both commercial and residential, means they can buy low, wait a long time and then sell maybe in ten years time when the next property boom is at its height, making substantial profits.

Critics of these funds say it is not a good trend as SWF's are secretive and as many come from so-called undemocratic countries in Asia and the Middle East it is a case of the East buying up the West with potential political repercussions. And it is oil - or petrodollars to be more exact, that is giving these funds vast wealth.

But economists are more laid back, and indeed welcoming, claiming they are rescuing the financial sector and could do the same for the property industry. Certainly the UK and most of Europe (only Germany is making regulation noises) don't seem particularly keen to crack down on them. Indeed France's President Nicolas Sarkozy is one of the first Western leaders to actively welcome Libya's Colonel Gaddafi in from the cold. Gaddafi's government has openly stated it has $155 billion to spend worldwide.

Oil revenues funding the spree

According to the International Monetary Fund they currently are worth $3 trillion and a report from Morgan Stanley predicts they could reach $12 trillion by 2015. They are undoubtedly the new global financial powerhouse.

'SWFs are the major state owned players in the 21st century. They are massive and are going to place money around the globe,' said Simon Johnson, economics director of the IMF.

Despite their lack of transparency, few publish information about their assets, liabilities or investment strategies, there is clear evidence they have been investing in finance markets and in major global companies. The state owned China Development Bank has a 3% stake in Barclays Bank and SWFs in Singapore and Abu Dhabi have stakes in Citigroup and Merrill Lynch.

Now there is growing evidence they are turning to property. The Investment Corporation of Dubai recently tried to buy struggling Spanish developer Inmobiliaria Colonial. It is reported that Bahrain's Mumtalakat Holding Company is interested in property development. China is preparing to raid property markets according to analysts in Shanghai.

Singapore's Government Investment Corporation has a number of interests in the UK including a 3% stake in British Land, a 40% stake in the Metro Centre in Gateshead, 17.5% in the Shearwater shopping centre, Kent, and 50% in the West Quay shopping centre in Southampton. It also has 25% in a £666 million residential development in Russia.

SWFs have spent £3.5 billion on commercial property in London according to the latest research from King Sturge. They have invested in offices, hotels and retail space. They are also interested in prime 'trophy' buildings in The City, London's financial district.

'In the last six months there has been a period of lower activity from UK investment funds and individuals,' said Deborah Hayward, senior associate at King Sturge. SWFs are filling the gap but they are by no means the only investors. There is also a lot of interest from Germany,' she added.

There is a similar picture in the US. 'US real estate markets are about to see an unprecedented level of foreign investment as the lack of domestic financing coupled with recession and the weak dollar helps to usher in a new base of investors to pick over the remains,' said Joe Valente, head of research at London based DTZ.

'Norwegian and Middle Eastern Sovereign Wealth Funds are flush with petrodollars. Abu Dhabi's fund has about $800 billion to invest and will allocate some of that to real estate while Norway's government has allocated 10% of its $375 billion pension fund to real estate,' he added.

So, are they vultures or could they be the saviours of global property markets? General opinion is in favour.

Knight Frank's research director Liam Bailey predicts they will have a positive effect on property markets. 'They are an additional source of equity and should be welcomed as such. They are looking to re-invest oil wealth in other sectors and diversify. But they are not going to create miracles overnight,' he said.

However he believes they could invest heavily in the UK, Ireland and Spain. 'In the next six months there is going to be a lot of potential in these countries to buy at a fair price,' he added.

Rebalancing world economies through wealth funds

The idea of prime assets in foreign hands, particularly those that are less transparent, seems to worry the politicians rather than the number crunchers. Hilary Clinton has been an outspoken critic and so has George Bush, although he now says he welcomes the investment.

Critics also point to the fact that most of the countries with SWFs, Norway being the main exception, are less than democratic and some, like Libya, were until recently outlawed from the global stage as sponsors of terrorism.

But according to Goldman Sachs, SWFs are the product of years of global imbalance and by investing in troubled Western economies they are helping to re-balance the world economy.

Criticism seems to be a question of transparency rather than one of trying to discourage their growth. The International Monetary Fund is looking into the possibility of setting up a voluntary code of conduct. Peter Mandleson, European Trade Commissioner, said recently that as long as they are not investing in sensitive industries like energy distribution and defence then there is no need for regulation.

But there are some warning shots being fired particularly around the issue of prime or 'trophy' buildings being owned by Middle Eastern, Asian and possibly in the future African, states. 'Gulf states are on a buying spree. They want prestigious, luxury buildings,' said Pierre Rolin, an investment consultant involved in Oman spending $900 million on the Heron Tower in London.

St. Martins asset management, which invests on behalf of Kuwait, has just bought the Willis building, one of the City of London's most iconic developments, for £400 million.

'It is too early to know what will happen when untapped oil reserves from various African states come into play. But SWFs are not going to go away,' said Bailey of Knight Frank. To date African countries have SWFs worth $121.1 billion and according to analysts that is only going to go upward. There can be little doubt that wealth funds are going to change the property investment landscape.

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