Sovereigns Building Real Empires

Portland, Gerding Edlen, San Francisco Bay Area, Seattle, Los Angeles, Chicago, Boston, New York City, Washington D.C., Connecticut, Oakland

Soverign real estate empires

Sovereign wealth funds boost their investments in real estate across the region, as well as globally.

THIS ARTICLE WAS PUBLISHED IN THE ‘Q’ – THE REGISTRY’S PRINT PUBLICATION – IN JULY 2015

By Greg Lamm

[dropcap]S[/dropcap]overeign wealth funds, like those controlled by oil rich United Arab Emirates or large U.S. public pensions, are increasing their investments in real estate properties to diversify their portfolios.

While a few Silicon Valley properties have been the target of sovereign wealth fund investments in recent months, local commercial real estate brokers say they are not seeing a stampede of similar deals. Foreign investors and sovereign wealth funds continue to favor trophy office properties in traditional foreign gateway cities such as San Francisco and New York.

The total assets of sovereign wealth funds have doubled since 2008, topping out at $6.31 trillion, according to a recent report by the London-based data-tracking firm Preqin. With all that money piling up and oil prices low, sovereign wealth funds have shown a willingness to venture beyond conservative investments such as government bonds and are increasingly looking at investing in real estate, according to the Preqin report.

[quote]Trophy properties in San Francisco have been the target of sovereign funds in recent years.[/quote]

Preqin’s research found that real estate assets held by sovereign wealth funds reached a record high of $742 billion in 2014. About 60 percent of sovereign funds have some assets invested in real estate. That includes some of the world’s largest funds such as the Abu Dhabi Investment Authority and Kuwait Investment Authority.

Soverign real estate empires 2

“There has been significant growth in the proportion of sovereign wealth funds that allocate capital to real estate since 2013,” according to the 2015 Preqin Sovereign Wealth Fund Review. “The interest of sovereign wealth funds and other institutional investors has enabled the private real estate market to enjoy a period of success, with private real estate assets under management reaching an all-time high of $742 billion at the end of 2014.”

The world’s largest sovereign fund, Norway’s Government Pension Fund Global, controls $818 million in assets, according to the Preqin annual review. The Norway fund has been investing heavily in real estate, both in the U.S. and in Europe and Asia. According to Real Capital Analytics, the Norway fund invested $7.6 billion globally in real estate in 2014, more than any other sovereign fund.

Its influence has been growing around the Bay Area, as well, where the fund has already made inroads through several large investments. In January 2014, the fund’s manager, Norges Bank Investment Management, purchased a 47.5 percent interest in the 945,249-square-foot 425 Market St. office building in San Francisco.

In September last year, Norges Bank bought a 49.9 percent stake in The Orrick Building. The 10-story Class A, LEED Platinum office building, also known as Foundry Square II, is located at 405 Howard St. in the city’s South Financial District. Tenants include the law firm Orrick, Herrington & Sutcliffe LLP, Moody’s Analytics and BlackRock. The property is one block from the $4 billion Transbay Transit Center, which links eight Bay Area counties through 11 transit systems. TIAA-CREF partnered with the Norway fund on the transaction. These same partners also have invested in real estate in New York, Boston and Washington, D.C.

Soverign real estate empires 4
Click to enlarge

Trophy properties in San Francisco have been the target of other sovereign funds in recent years, including 101 California St., the downtown skyscraper that was purchased in 2012 by an investment group led by Singapore’s sovereign wealth fund.

Sovereign wealth funds also have shown interest in Silicon Valley real estate, though there have only been a few deals recently, said Russell Ingrum, managing director and vice chairman at commercial real estate firm CBRE Group, Inc. in San Francisco.

The Abu Dhabi Investment Authority, the sovereign wealth fund owned by Emirate of Abu Dhabi, invested in Menlo Park-based Sand Hill Property Co.’s purchase of Cupertino’s Vallco mall last fall, as part of an effort to redevelop the property.

A more notable Silicon Valley real estate transaction involving a sovereign wealth fund was the January deal involving Sand Hill Commons, a Class A 133,000-square-foot office complex in Menlo Park. An Asian sovereign wealth fund reportedly snapped up a 49 percent of the property.

The property houses an A-list of venture capital firms, including Draper Fisher Jurvetson, Charles River Ventures, Menlo Ventures and Battery Ventures. It was a rare investment opportunity on the Silicon Valley’s most famous streets, and its sale price of about $1,800 a square foot set a near record for office space in the area.

Click to enlarge
Click to enlarge

The really attractive Bay Area investments for these funds, however, have been into tech companies, much more broadly than real estate. For example, Middle Eastern sovereign wealth fund Qatar Investment Authority recently participated in a $1.2 billion round of funding for the San Francisco ride-share startup Uber.

Meanwhile, Samruk-Kazyna, a strategic development sovereign wealth fund owned by the Central Asian country of Kazakhstan, announced plans in April to open a Silicon Valley office to invest in startup companies, joining other sovereign wealth funds already with a presence here.

The trend of sovereign wealth fund investments flowing into real estate is likely to continue, according to Preqin’s research. About 85 percent of the sovereign funds invested in real estate are below their target allocation of 5 percent or more of their funds they would like to invest in real estate.

It remains to be seen if that could bode well more broadly for the regional real estate market. Silicon Valley real estate might attract more eager investments from sovereign wealth funds if it had more trophy properties on the market, brokers say.

According to Rob Hielscher, a San Francisco-based managing director of commercial real estate services firm Jones Lang LaSalle’s capital markets group, “sovereign wealth fund investment into San Francisco has been much more prevalent than into Silicon Valley.” Yet with deals in the city being more difficult to extract, the rest of the region may yet find itself of interest to the foreign investors.