The U.S. government may be facing a budget deficit situation but there are other governments around the world that have been busy deploying their surpluses intothrough sovereign wealth funds. At a recent Deloitte & Touche Webinar on these funds, experts said opportunity should open up for the U.S. commercial real estate industry in the form of partnerships since the funds need local expertise.
The funds grabbed headlines by placing $35 billion of capital infusions in U.S. financial institutions, including Citigroup, during the past two years. One criticism of the funds has been that they are not transparent. They do not provide disclosure of investment strategy or audits through annual reports.
Guy Langford, an accounting principal with Deloitte's mergers and acquisitions services practice, noted that the assets managed by these funds have the potential to skyrocket to $12 trillion by 2016, up from $3 trillion currently. Compared with other investment sources, the current asset base of sovereign wealth funds represents more than that of both the hedge fund sector — which manages $1.5 trillion in assets — and the private equity sector — which has $700 billion in assets under management.
In recent years, sovereign wealth funds have increased investment activity, Langford said, going from about sixin 2003 to about 70 deals in 2007. More sovereign wealth funds are interested in real estate investments as well, he said, with 19 on a list of 24 investing in real estate. However, it is not clear exactly what their allocation to real estate is, according to Langford. Deloitte estimates that Temasek, the Singapore fund, has a 10 percent allocation, while the Abu Dhabi Investment Authority has an 8 percent allocation.
The challenge for these funds is that they don't have an acquisition team in place for transactions, opening up the field for partnerships with investors and operators who have a U.S. presence. Sovereign wealth funds could approach U.S. real estate investments through joint ventures, coinvestments or private deals with real estate operators or private equity. They could also invest in REITs that are currently considered to be trading below the value of the assets in their portfolios.