Asset Allocation

Large Investors Build Up Real Estate

<i>Property is illiquid, but long-term investors are increasingly prepared to wait as stable rent agreements could provide much needed income.</i>
Reported by Featured Author

(October 2, 2012) — Some of the world’s largest investors are beefing up their global real estate portfolios as prices become attractive and rents provide much needed yields amid uncertain economic conditions.

The Malaysian state pension fund, Kumpulan Wang Amanah Pencen (KWAP), yesterday revealed it had bought an office building in the City of London’s “Square Mile”, which houses Lloyds TSB – one of the United Kingdom’s largest retail banks.

The fund bought the property from developer Hammerson, which had initially taken it on through a joint venture with the Canadian Pension Plan Investment Board. The building on Gresham Street, near St Paul’s Cathedral, was sold for £200 million, an increase from the £175 million price tag the partnership paid in August 2010.

Hammerson said rents had produced £3 million in annual revenue. The company is focussing on retail property, rather than office space in the short-to-medium term.

Real estate has remained a firm choice with investors allocating to ‘alternative assets’ due to rent providing regular and often inflation-linked income. A survey by consultants Towers Watson and the Financial Times in July showed real estate investment companies took 40% of pension funds’ alternatives portfolios, 60% from insurance firms’, and 32% from sovereign wealth funds.

Elsewhere, the Norway Pension Fund Global revealed its intention to enter the real estate market in the United States. In an interview with Bloomberg, Trond Grande, deputy chief executive officer at Norges Bank Investment Management, said the $650 billion would invest in US property “by the end of next year at the latest”.

Grande continued: “The US is the largest real estate market so if you want to have a global portfolio you must have exposure to the US.”

He told Bloomberg that the next step was to move into the Asian property market.

Europe’s largest investor is already active in its home continent’s real estate sector with high-profile purchases in London and Paris.

In an interview with aiCIO this year, Petter Johnsen, CIO for equities at the fund, said there was a strategic allocation for real estate and other illiquid assets that would help it reach its investment return targets.

Johnsen said: “Looking at our ambition of a 4% real annual return, infrastructure could make sense. Real estate was our first step into private market investments-infrastructure has attractive characteristics but we are not at that stage yet.”

The fund has previously struggled with illiquid investments due to its need to be able to value and potentially liquidate its assets at any given moment.