Since oil exploitation shot the Gulf into the realms of interstellar wealth, money, oil and foreign relations have always gone hand in hand. Whether to secure long-term returns on their energy bonanza or for political considerations, Gulf Cooperation Council governments have been expanding their investment portfolio since the 1950s. Today, GCC sovereign wealth funds (SWFs) represent 37 percent of global SWF holdings, according to the United States-based SWF Institute. The International Monetary Fund pegged worldwide SWF assets at some $1.64 trillion by the end of March.
The real estate sector takes a substantial chunk of SWFs’ overall portfolio, whether through direct investments in prime real estate in major world cities or by indirect investments in listed companies and unlisted property funds. However, since most SWFs do not publish their financial statements nor disclose where they invested, it is hard to find out how much of their fund goes into a specific sector. The Abu Dhabi Investment Authority (ADIA), for example, in its first ever annual report last year, said that 5 to 10 percent of its investment goes into real estate. Considering the sums of money involved at ADIA, the difference between 5 and 10 percent is a not insignificant $31.35 billion.
“For the most part they don’t tell you where they are investing, it is a sort of speculation… do they directly invest in properties? Did they have an indirect interest? We don’t know that, they don’t disclose it to such granular levels,” said Saud Masud, head of research and senior analyst at UBS, the financial services firm.
ADIA is currently considered the largest SWF in the world, with assets under management amounting to $627 billion, according to the SWF Institute.
After the crisis
Experts Executive spoke to said the wide fluctuation in oil prices in recent years had curbed regional SWFs investment bravado, while the global financial crisis also put dents in their portfolios.
“You can guess that SWFs, in line with global investors, have suffered tremendously,” said Fadi Moussalli, regional director at Jones Lang LaSalle, the real estate services firm. “But the question is how much, since they don’t publish their figures,” he added.
Moussalli explained that while Abu Dhabi is dealing with its domestic issues, the most active SWF is currently Qatar Investment Authority (QIA), particularly in the real estate sector. The group has been acquiring large properties, mostly in London, through its investment arms such as Qatar Holding, Qatari Diar, and Barwa Real Estate.
In a series of well publicized big-ticket purchases, Qatari Diar purchased the historic Raffles Hotel in Singapore for $275 million in April, after the company invested a 40 percent stake in Fairmont Hotels and Resorts, while Qatar Holdings bought the famous Harrods department store in London for $2.3 billion in May. Barwa Real Estate, which is 45 percent owned by Qatari Diar, also announced in June that it would be acquiring the $371 million Park House development, an office and retail project in London due to be completed in 2012. Although it has not been confirmed yet, Britain’s The Times reported in June that QIA will be taking over the London-based Songbird Estates — owner and manager of Canary Wharf, a large upscale office and shopping development in East London. The newspaper said that if the transaction takes place, the fund will be investing some $700 million to buy the 76 percent it doesn’t already own. Despite the rumors, Songbird Estates said that it had not been officially approached by QIA. QIA board member Hussain al Abdalla said at a press conference in March that most of Qatar’s $30 billion planned investment in Europe and the United States will go into commodities and real estate, according to Bloomberg.
“Qataris will emerge as the top investors and there are other large scale transactions cooking that will be announced soon to the world,” said Moussalli.
According to Nicholas Maclean, managing partner at CB Richard Ellis for the Middle East, the reason Qatari SWFs are targeting the British market is because it is highly liquid and transparent, and thus assets could be disposed more easily than in other markets. The real estate market in London has recovered quicker than any other comparable market elsewhere in the world in the last six to nine months, attracting large amounts of capital.
Moussalli agreed, adding that the United Kingdom is currently offering investors the most tantalizing opportunities, in addition to some other major cities. “Paris is attracting more attention, Frankfurt, Rome to a lesser extent and also New York and Washington DC,” he said.
BRIC countries (Brazil, Russia, India and China) are also offering tempting investment opportunities for SWFs due to their high return on investment. “The levels of return which have been reported [in China] are so strong so that the market cannot be ignored,” said Maclean.
In May this year, Kuwaiti authorities signed a Memorandum of Understanding (MOU) with China as a first step toward acquiring a Qualified Foreign Institutional Investor (QFII) permit, which would enable the Kuwaiti SWF, Kuwait Investment Authority (KIA), to invest in stocks of Chinese companies and increase their general economic involvement in the country.
QIA also announced that it signed an agreement with Agriculture Bank of China on June 17 and will be investing $2.8 billion in the bank’s initial public offering (IPO), Bloomberg reported.
With the high return on investment, Masud cautions that BRIC markets also represent high risk. “Right now we are saying the BRICS are the strongest market, but what if China’s property bubble bursts? Then what happens?” he said. Masud also explained that since the SWFs deal in huge values, they might affect certain markets when moving in or out, and therefore they have to be careful when shifting their strategies. “When you are moving several billions of dollars out of a market into another, one has to reallocate carefully thereby not exacerbating any selling or buying pressures, which in turn impacts return on investment,” he added.
QIA is also showing high interest in investing in Malaysia. The SWF signed in May an MOU with Malaysian Development Bhd to establish a joint committee that would capitalize on investment opportunities in the energy and real estate sectors, with Qatar investing some $5 billion.
While from the outside it may seem that SWFs are splashing billions of dollars about, relatively, they are being fairly conservative and selective. “There is a bit more care and due diligence in where they invest, perhaps they are a bit more risk averse given market volatility over last three to four years,” said Masud, adding that funds invest for the long run and might therefore sit on their investments for a while without being productive.
Moussalli thinks that with the oil prices stabilizing in the $70 to $80 per barrel range, regional SWFs will resume their investments, with Qatar emerging as the biggest player in the region and Abu Dhabi remaining relatively low-key while it deals with its domestic concerns.
As for real estate, Maclean thinks that many of the SWFs are going to increase their investment in the sector, mainly because they see it holding promise with minimum volatility. He expects SWFs will be back in the market in force by the beginning of next year, mainly focusing on the United States, UK and China.
“They are becoming even more important investors in the real estate market going forward… [but] they are cautious, they are analyzing the market place globally, very carefully to make strategic decisions,” he concluded.