State-owned investors originated nearly US$20 billion in real estate deals in the first half of 2023, excluding their commitments to funds overseen by third party asset managers.
While the total value is down 10% y-o-y, Global SWF data finds a notable shift towards offices. Investment in offices rose 38% y-o-y to US$10.9 billion in H1, representing 56% of total direct investment in real estate – a significant increase from 36% of the total for the whole of 2022.
Decades ago, real estate investment by sovereign wealth funds was dominated by Middle Eastern investors snapping up trophy assets, such as luxury hotels and skyscrapers. Today, the sovereign investor industry is more sophisticated, examining how to expose their real estate portfolios to mega-trends, such as the development of the digital economy and tech disruption. Investment in the office sector is now driven by growth in data centers. This kind of property also serve as the infrastructural backbone of the digital economy, providing strong and stable yields and the potential for investment in expansion – ideal qualities in a high inflation environment marked by high volatility.
Data center investments included Ontario Teachers’ Pension Plan’s (OTPP) participation in a consortium with Brookfield Infrastructure Partners to acquire Texas-based Compass Datacenters at a company valuation of US$5.7 billion. Compass Datacenters designs and constructs data centers for some of the world’s largest cloud services providers and organizations on campuses primarily in North America and EMEA.
Meanwhile, Saudi Arabia’s Public Investment Fund (PIF) is approaching data centers from a strategic economic viewpoint. In May, it formed a partnership with DigitalBridge Group to develop data centers in Saudi Arabia and across the Gulf Cooperation Council (GCC), with the potential to expand into towers, fiber, small cell, and Edge infrastructure in the future.
Strategic concerns also prompted India’s National Investment and Infrastructure Fund (NIIF) to announce a partnership - Digital Edge DC - with Singapore’s Digital Edge and AGP DC InvestCo to develop a pan-India portfolio of hyperscale data centers. It is starting with a US$2 billion investment in one of the country’s biggest facilities, a greenfield 300MW hyperscale facility in Navi Mumbai. The NIIF-backed platform is expected to provide a competitive advantage to India’s economy in the long run. Moving forward, Digital Edge DC will continue to capture the demand of the market via investing heavily in more data centers, as aligned with its strategy to further build its cloud standing.
India’s potential has attracted a raft of other funds in tech-oriented real estate. In February, Ivanhoé Cambridge – the real estate arm of Canadian pension fund CDPQ – and Singaporean state-owned investor Temasek’s Mapletree backed a INR150 billion (US$1.8 billion) tech-focused Indian real estate platform. In what is expected to become the largest investment platforms in the Indian real estate office sector, properties and projects were identified in the bid to establish high-quality offices in the major cities throughout India. For its part, Ivanhoe Cambridge is bringing in its expertise and experience as an institutional investor while Mapletree will be offering its property management services.
The residential market also experienced strong interest from state-owned investors. 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. In H1 2023, state investors increased their investment in the sector by 78% y-o-y to US$4.9 billion, representing 25% of investment.
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.
OTPP’s real estate arm Cadillac Fairview was involved in a major acquisition in the residential market, purchasing Lincoln Property company in March. CF have a close partnership dating back to 2019 when they co-sponsored a long-term investment program to develop and acquire high-quality multifamily assets in US markets. By the time of the acquisition, Lincoln had completed over US$1.5 billion of acquisitions and had another US$2 billion under development.
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.
Office and residential markets gained at the expense of logistics, which had drawn maximum interest during the pandemic. In 2021, logistics represented 45% of total SOI direct investment in real estate, but by H1 2023 the proportion diminished to 13%. Yet, Asian markets still attracted big deals in logistics real estate with GIC buying a portfolio of six logistics assets in Japan in April for more than US$800 million from Blackstone. It was the biggest real estate deal in Japan in H1. GIC began its push for Japanese logistics real estate in 2008 when it acquired all of ProLogis’ property fund interests in Japan and China operations for a total cash consideration of US$1.3 billion.
Meanwhile, the completion in January of a tender award for the first logistics area at the Adolfo Suárez Madrid-Barajas Airport City to P3 Group will help raise the value of GIC’s European logistics real estate platform to around US$9 billion in 2023, securing its place as one of Europe’s biggest logistics investors. GIC acquired P3 Logistics parks from TPG and CDPQ’s real estate subsidiary Ivanhoé Cambridge for EUR2.4 billion in 2016.
In logistics real estate, state-owned investors have often bought out entire portfolios from other investors, rather than build up a platform and originate deals by themselves. Alternatively, they will seek joint ventures. Examples in 2022 included an agreement between Canadian public pension fund OTPP’s real estate subsidiary Cadillac Fairview signing a deal with Boreal IM to create a EUR3 billion pan-European logistics portfolio, starting with EUR250 million in an industrial park in Park Royal, West London and another in the Port of Rotterdam, followed by the acquisition of 15 warehouses in the Netherlands.