Sovereign Wealth Funds Gain Ground

Sovereign wealth funds are emerging as contentious players in the financial markets, and analysts and industry leaders say that as real estate companies’ valuations fall and capital becomes more constrained, such funds will be making major investments in the real estate investment trusts.According to a report issued by the international capital group of Jones Lang LaSalle, the second-largest sovereign wealth fund, Norway Government Pension Fund, recently allocated 5% of its assets to real estate, infusing another $20 billion of capital into the real estate markets.“If China follows suit with 5% of their foreign allocation into real estate, we are at nearly $25 billion. If Korea puts a third of their $10 billion allocated to alternative investment in real estate, that brings the total of fresh real estate capital coming to play in the short term up to $28 billion,” the report said. “If the funds already active in real estate grow at the pace some have suggested, and maintain the same allocation to real estate, the amount of new capital entering the market could be a multiple of this.”Sovereign wealth funds control an estimated $3.85 trillion, a figure that, according to the International Monetary Fund, could expand to between $12 trillion and $15 trillion by 2015. The financial services provider State Street says sovereign wealth funds could collectively own more than 5% of the world’s major companies by 2013.Already, these funds have provided capital to publicly traded financial concerns including Citigroup, Merrill Lynch, Morgan Stanley, and UBS. A number of them also are investing in private equity funds that are also active investors in commercial real estate, such as the Carlyle Group, the Blackstone Group, and Och-Ziff Capital Management.The world has approximately 50 sovereign wealth funds, spread among 35 countries, and approximately 10% to 15% of their assets are invested in real estate. The richest funds include Abu Dhabi Investment Authority ($875 billion), the Government of Singapore Investments Corp. ($330 billion), and Norway’s Government Pension Fund — Global ($322 billion). Some of the world’s largest funds include Singapore’s Temasek Holdings, the China Investment Fund, and Dubai International Corp.Countries have used sovereign wealth funds as instruments through which to buy assets since the early 1950s, when Norway and Singapore, followed by Kuwait, sought new strategies to insulate themselves from exchange rate fluctuation. There are also sovereign wealth funds in Saudi Arabia, Qatar, Libya, Algeria, Australia, Alaska, Brunei, Russia, and Canada.The stated goal of these funds is the preservation of current wealth for future generations; protection and stabilization of the budget and economy from excess volatility in revenues and exports; diversification from nonrenewable commodity exports; earning of greater returns on foreign exchange reserves, and funding social and economical development and sustainable long-term capital growth for targeted companies.The Web site Money Morning refers to sovereign wealth funds as “Global Cash Barons,” adding, “By bringing their huge hoards of cash to bear on the financial problems of the day, the sovereign Cash Barons are — in a way — the modern manifestation of the 19th Century Robber Barons.” These funds, the Web site adds, could also be called “Captains of Industry,” which the novelist and philosopher Ayn Rand described as being among the “greatest benefactors of mankind, because they had brought the greatest good and an impossible standard of living — impossible by all historical trends — to the country in which they functioned.”“Foreign investors and sovereign wealth funds have had a transparent impact on the residential condominium market and the institutional quality office building market, respectively,” the chairman of Massey Knakal Realty Services, Robert Knakal, said. “The extraordinarily weak dollar has made our for-sale housing stock enticing for foreign buyers, and they have helped to keep activity in the condo market at reasonable levels. Although the origin of the funds varies from cycle to cycle, foreign capital has always been attracted to our trophy office properties. This dynamic is based upon the perception that our markets are relatively stable compared with other international destinations for the capital. The weak dollar has much less to do with this investment strategy, as rents are collected in the same weak dollar, and profits on an eventual sale will be in that same weak dollar. Unless currency arbitrage is part of the buyer’s strategy (thinking the dollar will grow stronger relative to their currency over a specific holding period), the weak dollar does not create much motivation to buy in the U.S.”Mr. Knakal added: “Foreign capital continues to be a factor in the non-institutional segment of the building sales market. While approximately 15% of our 500 sales this year will be purchased by foreign-based investors, a significant amount of foreign capital finds its way into our market in less transparent ways, mainly equity financing of local operators who are conversant with our rent regulation process, and via investments in opportunity and hedge funds, which provide that same equity for domestic investors. While the unprecedented global economic expansion seen since 2002 has started to slow, fortunes have been made all over the globe, and much of that capital is being deployed into our building sales market. New York City has clearly been a beneficiary of the globalization of the real estate industry.”Sovereign wealth funds and foreign investors are very interested in owning real estate in the hospitality industry. Industry leaders expect these investors to be the leading bidders for the Helmsley Park Lane Hotel on Central Park, as well as other Manhattan trophy properties.“New York City continues to be the ideal global destination for capital investment because of the combination of extremely high barriers to entry, limited availability of assets for sale, unparalleled demand generators, and political stability,” the executive vice president, principal, and head of the U.S. Hotel Group at Cushman & Wakefield Sonnenblick Goldman, Mark Gordon, said. “While some domestic investors are concerned about short-term challenges, there is no better global market to invest in from a medium- to long-term perspective. I am meeting with more global investors, including sovereign wealth funds, each week who are aggressively seeking investment opportunities in New York than ever before.”Sovereign wealth funds are no strangers to acquiring real estate in New York City:Earlier this month, the Abu Dhabi Investment Council purchased a 90% stake in the landmark Chrysler Building for $800 million from German real estate investors and Tishman Speyer.In June, a joint venture of Boston Properties (which purchased a 60% interest); a partnership managed by Goldman Sachs, U.S. Real Estate Opportunities I L.P., and a Dubai-based sovereign wealth fund, Meraas Capital LLC, purchased the General Motors Building for $2.8 billion.In April 2005, the Dubai government’s holding company, Istithmar, bought a 99-year lease-hold interest in the 32-story office tower built over the eight-story Grand Central Post Office building at 450 Lexington Ave. for $660 million. In November 2005, Istithmar purchased 230 Park Ave. for $705 million. A few months later, in 2006, it purchased the 1.2 million-square-foot office complex at 280 Park Ave. for $1.2 billion; the former Knickerbocker Hotel, now an office building, at 1466 Broadway for $300 million, and the W Hotel Union Square for $285 million.In 2007, Istithmar acquired a 95% interest in the Mandarin Oriental Hotel at the Time Warner Center. Later in the year, the fund decided that it was prudent to sell its Park Avenue properties, reaping a modest profit of $595 million: It sold 280 Park Ave. to Broadway Properties and Bahrain-based Investcorp for $1.35 billion in November 2007, and 230 Park Ave. to a group including a fund managed by Goldman Sachs for $1.15 billion in December 2007.Istithmar is part of the Investment Corporation of Dubai, which, in September 2005, paid $440 million for the hotel component of the famed Essex House overlooking Central Park. The company owns 100% interest in national retailers Barneys New York and the department store Loehmann’s. The company has a $5 billion investment, or 8.7% interest, in Mirage Holdings in Las Vegas, and a 9.2% interest in the Orient Express Hotels. Earlier this month, Orient Express Hotels signed a letter of intent to establish a 50/50 strategic partnership with the Related Group to develop hotels and residences in South Beach in Miami; Cartagena, Colombia, and Panama City, Panama.Investcorp has also been an active player in the real estate market in America. Since 1995, it has acquired around 200 properties totaling approximately $7 billion in value. It currently has more than $4 billion of property under management. In addition to its ownership in 280 Park Ave., it owns a rental apartment house, the Residences at City Place, in Edgewater, N.J., which is being converted to condominiums. The company also is jointly developing a new condominium at 125 N. 10th St. in Williamsburg, Brooklyn. In October 2006, the company sold its interest in the office building at 105-107 W. 57th St. and an office complex at One Campus Drive in Parsippany, N.J.In December, the Related Companies, which was the co-developer of the Time Warner Center and is the designated developer of the Hudson Yards, announced that it received about $1 billion in debt financing from three Middle Eastern investors: an affiliate of Abu Dhabi’s Mubadala Development Company, the Saudi Arabian royal family-owned Olayan Group, and an unidentified sovereign wealth fund. It also reported that in addition to Goldman Sachs and MSD Capital, the money management firm of Michael Dell, founder of Dell, purchased about a $400 million stake in the company.Kingdom Holding Company, led by Prince Alwaleed bin Talal bin Abdulaziz Alsaud, is a publicly traded company that was listed on the Saudi Stock Exchange, Tadawul, in 2007. Today, the portfolio has its main interest in landmark hotel properties and hotel management companies, real estate development, financial services, technology, and press and broadcast companies. The company, along with Elad Properties, is the owner of the hotel component of the Plaza Hotel and retail collection.Other hotels are owned though its majority-owned Dubai listed subsidiary, Kingdom Hotel Investments. Among the hotel management companies are the Four Seasons Hotels & Resorts, Fairmont Raffles Hotels (which include Fairmont, Raffles, and Swissotel), and Mövenpick Hotels & Resorts.With a barrel of oil selling for $124, expect these sovereign wealth funds to grow and invest further in commercial real estate in America, and especially in New York City.Mr. Stoler, a contributing editor of The New York Sun, is a television and radio broadcaster and a senior principal at a real estate investment fund. He can be reached at mstoler@newyorkrealestatetv.com.

Sovereign Wealth Funds Gain Ground

Sovereign Wealth Funds Gain Ground

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