Expanding SWFs look for alternatives
Norges Bank ties up with Axa for real estate loans; AUM at global sovereign wealth funds top $5 trillion
This year, sovereign wealth funds have grown at their fastest rate since 2007, adding $750 billion to assets under management in the year to October.
A recent study by alternative assets research firm Preqin shows that total assets under management in sovereign wealth funds globally now exceed $5 trillion, having increased from $4.62 trillion to $5.38 trillion over the past year.
These figures underscore the growing presence of sovereign wealth funds in many alternative asset classes and their importance will only increase. Fifteen new sovereign wealth funds have been set up since 2008, eight of which were established in the past two years. These include the Western Australian Future Fund, which was set up in December 2012, and the Soberano Angolana fund set up in October last year. The sector is still dominated by Norway’s Government Pension Fund, which now has $775.2 billion in assets under management – an increase of $185 billion since 2012. The growth in this investor class is good news for the real estate and infrastructure sectors, which provide the kind of long-term income streams that many of these funds want.
According to the Preqin survey, 57% of all sovereign wealth funds globally allocate to infrastructure and 54% to real estate. The appetite for real estate has risen in MENA, North America and Asia-based funds to 81%, 80% and 75% respectively. The allocation to private equity and hedge funds has fallen from 57% and 38% respectively last year to 45% and 31%. This can, however, be partly accounted for by new players, which are less likely to allocate to these types of alternative assets in their first few years of existence.
|Isabelle Scemama, global head of real asset finance at Axa Real Estate|
This allocation to real estate could not come at a better time for the asset class. According to property consultancy DTZ, the real estate funding gap in Europe stands at $50 billion for 2013 to 2014. "The trend of bank disintermediation is growing at the same time as the market is facing an unprecedented refinancing wall," says Isabelle Scemama, global head of real asset finance at Axa Real Estate. "This is a structural trend. The pipeline in Europe is larger than it has ever been – we have reviewed $20 billion of loans since the beginning of 2013. The banks have extensively used the ‘extend and pretend’ in the past, but the refinancing wall is now materializing." Scemama knows whereof she speaks, having recently cemented a joint venture with Norges Bank Investment Management, which manages Norway’s Government Pension Fund. The parties have entered a European CRE loan co-investment programme, targeting investments in large-size senior loans of up to €600 million in the UK, France and Germany.
"The real trend in Europe is insurance companies and pension funds making a strategic allocation to real estate loans," she says. "Whereas before they may have been dipping their toes in the water by investing in loans, now it is part of their strategic allocation. We started to open our platform to third-party clients in 2010 and now have 34 insurance companies and pension fund clients that have decided not to build their own platforms but want exposure to the asset class."
Axa Real Estate has so far invested €1.8 billion in European CRE loans this year from its €7.5 billion CRE debt platform, 45% of which relates to assets in the UK. The firm now has €46 billion of assets under management and has been active in direct lending for some time. "We launched our real estate platform in 2005 so we have more than seven years’ experience in real estate lending," says Scemama.
Despite the fact that it can allocate up to 5% to property, Norges Bank has so far restricted its activities in the sector, receiving a mandate to invest in real estate only as recently as 2010. It has partnered with Axa Real Estate before, however, on the 2011 purchase of a $700 million property portfolio in Paris. According to NBIM, the Axa tie-up enables it to achieve two main objectives: to invest in commercial real estate debt and to invest alongside an experienced team with balance-sheet capacity and a long-term investment horizon.
"Size is critical in this market," says Scemama. "We were already the largest institutional real estate lender in Europe before, and we now have the capacity to underwrite loans of up to €600 million. We are the largest underwriter in Europe; that gives us a competitive advantage in getting access to the best loans and in offering capacity to monitor loan structuring."
In their search for long-term, diversified assets more sovereign wealth funds will likely follow Norges Bank’s lead in increasing their exposure to real estate as part of their allocation to alternative asset classes.
"The level of capital flowing into alternatives from sovereign wealth funds remains extremely significant," says Amy Bensted, head of hedge fund products at Preqin. "Once the newly established sovereign wealth funds become more developed we could see a number of new allocators to the space."