Prime Commercial Real Estate Back in Favour with Sovereign Wealth Fund Managers

Posted on 7 August, 2012 by Jodee Redmond

In the wake of the US subprime collapse, real estate was not viewed as a favourable place for investors, but this view has started to shift as sovereign wealth, pension, and insurance funds managers are investment vehicles which can offer a better rate of return than government bonds.

Sovereign wealth funds alone are a $4 trillion business and pension funds account for another $30 trillion in holdings. If even a small percentage of these funds were invested in commercial real estate, it would represent a huge influx of new money available to this sector.

Low-interest rates on these “safe” investment choices are leading managers to consider others options and first-rate commercial properties located anywhere from London to Bangkok are currently in demand. Sovereign wealth funds are getting positive yields of between five and seven per cent in commercial real estate, which makes this a very attractive investment. They are able to get capital appreciation as well as a yield on their purchase.

In a recent high-end commercial real estate deal, a Norwegian sovereign wealth fund teamed up with Assicurazioni Generali, an Italian insurance company, to manage retail and office properties in central Paris. The cash value of the commercial properties the companies involved is 550 million euros.

Real estate stocks and investment trusts are another way for investors to get into the market. According to Thomson Reuters DataStream, dividend yields for stocks listed on the MSCI real estate index for the euro zone reach close to seven per cent. This figure is far more impressive than the negative or close-to-zero returns investors can expect from government bonds at present.

The best properties for commercial investors are ones in sought-after areas which are occupied by financially-solid tenants who committed to a long-term lease. Anything less is not going to pass muster for fund managers who are looking for investments offering a similar level of security as bonds but with the potential for better yields.




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