Makale

How the extended cycle is impacting sovereign wealth fund spending

A major player in commercial real estate markets, Middle Eastern sovereign wealth funds are facing a challenging late-cycle investment environment that is impacting their deployment strategies.

12 Şubat 2019

Gaining direct exposure to real estate is proving harder than earlier in the current cycle for SWFs, says Fadi Moussalli, director of JLL’s International Capital Coverage in the Middle East.

“They’re aware that deploying capital is a concern when we’re at the top of the cycle; interest rates in the U.S. and U.K are on the up and yields are at historically tight levels. Mature, core markets – where most SWFs have focused – are fully-priced.”

With oil prices having fallen to around US$ 60 a barrel, Middle Eastern SWFs are now less able to take oil surpluses and re-invest in real estate.

Furthermore, the intense bidding environments which have prevailed in the U.S., U.K and continental Europe in recent years have made life tougher for Middle Eastern SWFs.

Such competition, says Moussalli, requires quicker decision-making processes – especially in hot markets.

“The many levels of governance and procedures they have in place can hinder their ability to win the bidding process,” explains Moussalli. “The idea of competing in a limited time frame is not compatible with SWF decision-making mechanisms.”

Instead, Moussalli says that SWFs gain exposure to their preferred sectors and geographies in a more “creative way”, discretely pursuing less public deals and special situations. Likewise, exploring new avenues is commonplace for these entities – ranging from classic equity positions to debt strategies.

“A fund manager or asset management platform is a typical route for SWFs to pursue on both the equity and debt side,” he says. “The latter is proving a popular late-cycle strategy for outbound SWF capital from across the Middle East region.”

With price appreciation having slowed, gaining exposure to real estate via debt is seen as a smart choice at this point in the cycle and has grown in popularity. Real estate debt forms a large part of the wider private debt landscape for SWFs from across the globe.

“The fact that both debt and mezzanine investments enjoy tax advantages versus equity ownership is an added benefit,” says Moussalli. “In particular, SWFs are attracted to the mezzanine piece of the capital stack, which typically returns less than the equity but more than the senior debt.”

Allocating capital to debt funds is just one route for Middle Eastern SWFs into the lending arena. Moussalli says lending directly to investors seeking acquisition finance is also an option.

For equity deals, more partnerships and joint ventures are a viable alternative route into popular real estate markets. The Kingdom of Bahrain’s SWF, Mumtalakat, has long been an adopter of the strategy. Last year, it announced it had entered a partnership with New York-based Sentinel Real Estate Investment Corporation, investing in two assets in North Carolina.

“While it’s true to say the SWF gets access to local know-how and practical management – marrying capital with expertise – going into a joint venture or partnership is a sensible decision at this point in the cycle – and in some cases can even open the door to more deals on a repeat basis,” says Moussalli. “SWFs have the advantage of being deep-pocketed and at the same time, highly desirable future equity partners.”

Asset classes such as office, retail and hospitality have traditionally been the main focus for SWFs, Moussalli says. However, alternative sectors, such as data centers, logistics, healthcare and student housing, are becoming increasingly viable, following the wider hunt for yield by all types of investors.

“Moving into comparatively less competitive sectors is more likely achieved via allocations to sector-specific funds,” explains Moussalli.

Geographically speaking, Moussalli says that with prices nearing record highs in the global gateway cities typically favored by SWFs, a move to less liquid markets is likely.

“Even though liquidity is lower in secondary locations, Middle Eastern SWF’s have ventured into these unusual markets in quest for higher yields,” he says.

Cities such as Lyon, Sao Paolo, Saint Petersburg, Rotterdam and Warsaw have in recent years attracted Middle Eastern SWF capital.

Finding a home for capital is hard, says Moussalli.

“But that’s an issue faced by investors generally,” he says. “Going beyond mainstream sectors and geographies seems to be the pertinent way forward.”

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