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In recent years sovereign wealth funds (SWFs) have ramped up
their exposure to real assets, snapping up iconic skyscrapers in
London and Manhattan, luxury hotels and multi-year concessions
for Australian ports.
The aim was to tap the "illiquidity premium" on offer for
investors able to tie up capital for longer as an alternative to
low-yielding government bonds.
But Bernardo Bortolotti, director of the sovereign investment
lab at Bocconi University and co-author of a report showing a
slowdown in SWF real estate and infrastructure investment in
2017, said the high watermark for private dealmaking had passed.
This is partly because some Middle East funds have rebalanced
their portfolios towards more liquid assets such as equities to
accommodate drawdowns from cash-strapped governments needing to
plug budget gaps.
But it's also because the United States is locked in an
increasingly bitter dispute with its key trading partners,
potentially reducing trade and global economic growth.
Bortolotti warned that if exports fell, SWF growth rates and
activity would also slow: "They still have $6 trillion-plus to
deploy but we have a structural break in the accumulation of
assets," he said.
"We are at a turning point ... Unless Asia can create an area of
regional free trade to replace the intercontinental flows then
the same issues that are emerging now in the Gulf could also
emerge in Asia."
In July, Singapore's GIC, a big sovereign investor in real
assets, said it expected lower long-term returns in an uncertain
investment climate. This echoed comments from peer Temasek which
is looking to temper the pace of its investments as trade
tensions ratchet up. China's CIC also expressed concerns.
According to the SWF investment activity report produced in
association with the International Forum of SWFs (IFSWF), the
number of property deals fell to 42 in 2017 from 77 a year
earlier while infrastructure investments fell to 28 from 33.
Combined deal value fell to $23.2 billion in 2017 from $25
billion.
SWFs are finding it more difficult to find suitable properties
in the commercial and office space - traditionally favored
targets - as more investors have entered the market, driving up
prices.
"There's more competition from Chinese insurers and large Asian
institutions looking at core real estate in London and New
York," said Victoria Barbary, IFSWF director of strategy and
communications.
Growing protectionism is also likely to stymie foreign direct
investment in strategic sectors, Bortolotti said.
"Investing in U.S. infrastructure will be very difficult now
from a political standpoint - any kind of investment from China
will be more carefully scrutinized, and that is spilling over
into Europe."
The U.S. wants to beef up the powers of its Committee on Foreign
Investment in the United States (CFIUS) to review transactions
for national security risks.
As a result, SWFs are turning to Asia and Latin America, often
investing through tie-ups with government entities to mitigate
risk. In 2017, they completed 17 direct investments in emerging
market infrastructure, worth $3.8 billion, versus 11 deals in
developed markets, worth $4.2 billion.
"Working with a local partner, which may be a sovereign fund or
strategic fund, makes these investments a lot more attractive,"
said Barbary.
(Reporting by Claire Milhench; Editing by Toby Chopra)
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