State-owned investors are shifting from logistics properties that enjoyed a boom during the pandemic to residential property as they seek inflation-proof assets for long-term yield.

In 2015-2019, residential property investments accounted for an average of 6% of real estate investment by state-owned investors, but in 2020-2022 the rate doubled to 12%. An all-time peak of close to US$10 billion was achieved in 2021 and trends so far this quarter indicate 2023 could see a new record high.

Investment is driven by the need to protect portfolios from the kind of volatility seen in public markets and the risks associated with private equity in a high inflation, low growth environment. Residential building activity is most exposed to elevated interest rates, given its more procyclical nature and high interest rate sensitivity. Yet, there is a long-term structural shortage of housing in many developed markets. The recent drop in prices has offered sovereign investors an opportunity to invest cheaply, with faith in medium- to long-term recovery as the cost-of-living crisis abates.

This week, the US$95 billion Oregon Public Employees Retirement Fund (PERF) announced it would invest up to US$1.1 billion in real estate in 2023. Investment would likely be via separate accounts and open-ended real estate funds which account for 70% of its portfolio. A key target of its strategy will be multi-family properties with a greater emphasis than the past in Europe and Asia as PERF increases its international exposures.

Real estate helped support PERF’s performance in 2022 with a return of 15.1% on its US$13.9 billion portfolio – well above its target of 12.5%. The overall portfolio returned -1.6%, compared to a policy benchmark of -8.5%. Over a 10-year period, real estate returned an annual average of 11.1%, compared to its benchmark of 9.8% and an 8.5% average return on the overall portfolio.

Meanwhile, the real estate subsidiary of Canadian public pension fund Ontario Teachers Pension Plan (OTPP), Cadillac Fairview, acquired a 46% stake in the Lincoln Property Company's residential unit Lincoln Residential, taking its total interest to 95%. In 2019, Lincoln and Cadillac Fairview established a co-investment platform to acquire high-quality multifamily assets in the US. Lincoln has completed over C$1.5 billion (US$1.1 billion) of acquisitions and has another C$2 billion (US$1.4 billion) under development.

John Sullivan, CEO of Cadillac Fairview, said, “For the past five years Cadillac Fairview has been actively focused on growing and diversifying its global real estate portfolio with best-in-class partners, and since collaborating with Lincoln Residential in 2019 we’ve had tremendous success, which speaks to the strong collaboration between our leadership teams.”

In the Middle East, last month the US$35 billion Dubai Holding, run by Dubai ruler Sheikh Mohammed bin Rashid al-Maktoum, forged a deal with Aldar Properties (25% owned by Abu Dhabi’s Mubadala) to develop new properties across prime locations in Dubai. It plans to develop new communities in three locations across an area of 3.6 sq km. The developments will feature more than 9,000 units consisting of villas, townhouses, and apartments supported by retail and community facilities.

Amit Kaushal, group CEO Dubai Holding, said: “With the favourable economic environment in Dubai and the upward trend in its real estate sector, we are well positioned to attract international investors through such strategic partnerships that bring new and exciting offerings to the market.”

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