Commercial property spending spree by sovereign wealth funds predicted

Sovereign wealth funds could invest as much as $725 billion in global commercial real estate by the end of 2015, according to the latest report.

With nearly $4 trillion of total assets currently under sovereign wealth fund control, an increase from 4% to 7% in the next seven years would bring total worldwide commercial real estate investments to $280 billion, the report from property consultant CB Richard Ellis estimates.

'The attraction of property is that it provides the yield of bonds and the appreciation of stocks. In a distressed environment, trophy assets become available,' said Ray Torto, chief global economist at CBRE.

'Given that the real estate sector's investment characteristics – current income combined with long-term appreciation – closely match SWF requirements, we expect them to increase their weighting of commercial property,' he added.

In order to achieve this kind of figure SWFs will need to branch out of familiar markets in the US and Middle East and diversify future investments widely across territories, companies and investment vehicles, CBRE said.

New destinations are expected to include Japan, the UK, Saudi Arabia, Singapore, China, Norway and Australia and other countries with currencies not already held in the SWFs foreign reserves. Funds might also invest in property shares and debt to broaden their exposure.

'It is also very possible that we will see outright acquisitions of property companies, listed and unlisted, as a way of assembling a significant direct real estate portfolio rapidly as well as acquiring the property management infrastructure to go with it,' said Michael Haddock, director in CBRE's EMEA research team.

The report estimates that as much as half of the property-related investments made by SWFs will be on acquisitions of buildings and as much as 30% will be put into private-equity funds and private real-estate investment trusts. As much as 25% will be invested in real estate debt.