International real estate focused on key markets with potential for long-term investment International real estate allocations also grew in the period to 2016, though at a lower rate than home market. Sovereigns reported that increased international allocations in many cases represented tactical factors such as restrictions in domestic market or challenges achieving target allocations in infrastructure or private equity.
As aresult, increases in international allocations were relatively concentrated in terms of asset quality (tier-1 assets offering a comparable return profile of private equity and infrastructure). This has led sovereigns to expect greater growth in high grade office and commercial real estate (figure 20), with long-term tenancies underpinning income generation, over industrial or residential categories which offer asset growth and development potential.
The importance of quality to international real estate allocations is also evident in geographic allocations. Sovereigns prefer ‘safe haven’ markets such as North America and Western Europe when investing in overseas real estate, with developed markets leading sovereign citations for preferred real estate locations shown in figure 21.
Sovereigns acknowledged the benefits
of external asset managers, particularly
for international allocations
The success of domestic real estate investments in
matching liabilities and the scope to capture liquidity
alpha through internal models is reflected in the pace
of home market allocations over the past three years.
However, looking forward sovereigns appreciate
that further increases may be constrained by asset
allocation or the maturity and depth of the local
market. Many sovereigns also noted that there were
risks associated with further internal investment in
home market real estate:
- Despite a focus on high-quality assets, liquidity is a challenge for real estate investors and many sovereigns are approaching limits on the size of their investments
- Growing internalisation leaves sovereigns without third-party support in governance and compliance for their real estate investments
- lf interest rates rise, demand for real estate is expected to slow, with implications for both asset pricing and liquidity
However, on the assumption that interest rates
globally remain lower near-term, we expect that
sovereign demand for real estate will grow faster
than sovereigns are willing or able to deploy to
home markets. As a result, we expect that over
the next three years allocations to international
markets will grow, and diversification outside
preferred geographies and classes will accelerate.
Despite success in greenfield investing in their home
market, sovereigns are less able to influence supply
of real estate opportunities overseas, providing an
opportunity for external asset managers to support
sovereigns in sourcing and managing real estate deals.
Developed market sovereigns have access to a wide range of high- quality domestic realestate assets.
Fig 20. Future increase in real estate sub-asset class allocations (% citations)
Sample is based on sovereign investors and excludes central banks. Sample=25.
28
Office
Commercial
Residential
Industrial
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