Real Estate: Back in Fashion… with a Twist

In 2023, real estate investments by sovereign wealth funds rose almost 50% to $14.8 billion, an amount last seen in 2018. Real estate also accounted for 20% of sovereign wealth funds’ direct investments. Including infrastructure investments, hard assets represent 40% of sovereign investments combined.

For the first time since 2018, real estate and infrastructure investments represented 40% of all sovereign wealth funds’ direct investments in 2023. Direct investments in infrastructure represented 20% of the total, slightly lower than the all-time high of 24% of all direct investments in 2022.

Taking advantage of depressed valuations resulting from high interest rates, sovereign wealth funds returned to the real estate market. As borrowing became more expensive, fewer investors wanted to purchase real estate, causing values to fall. Sovereign wealth funds were attracted by the asset class for portfolio diversification, as real estate offers a tangible and stable income amid market volatility and inflation. Sovereign wealth funds are also drawn to property’s attractive yields and income generation potential, particularly in growth areas such as industrial and logistics properties and rental housing. Finally, with a focus on long-term value and capital preservation, sovereign funds with a domestic investment mandate also saw real estate as strategic for economic development, particularly in the tourism sector, recognising its potential to stimulate economic growth while providing a hedge against inflation.

Source: IFSWF Database, as of 10/04/2024.

In 2023, sovereign wealth funds invested $14.8 billion in 39 real estate deals. These totals represent a significant increase from the $10.9 billion invested in 2022, marking the highest total value since 2017. The number of deals also increased from 28 in 2022. These investments were concentrated in the industrial, logistics and tourism sectors.

Retail Development & REIT Mixed-Use, Residential & Other Hotels Logistics & Datacentre Co-working & Commercial

Source: IFSWF Database, as of 10/04/2024.

Industrial and logistics

Aerial top down view view of a large logistics park with a warehouse.

Over the past decade, sovereign wealth funds have been consistently interested in industrial and logistics real estate. This is a long-term trend resulting from investment opportunities arising from the ongoing expansion of e-commerce and the need for resilient supply chains. In 2023, sovereign wealth funds invested $6 billion in 10 deals, a high volume and level of activity but still in line with the long-term trends. In 2022, however, we recorded only two deals and $1 billion, the lowest invested since the IFSWF database started.

Sovereign wealth funds often invest in this sector with partners or through joint ventures. This approach offers several advantages, including knowledge-sharing, sourcing deals not ordinarily available to them, and allowing partners to share operational risks. Partnerships also provide access to expertise and local market knowledge, which are crucial in more specialist sectors of the real estate market, such as industrial and logistics, and require a deep understanding of specific market dynamics. Investors can make more informed decisions by collaborating with general partners or developers with established expertise. A prime example of this strategy is the joint venture between GIC, the Abu Dhabi Investment Authority, and INDUS Realty Trust in 2023. GIC and Centerbridge Partners completed the acquisition of INDUS, an American industrial/logistics REIT, in an all-cash transaction for approximately $868 million. A subsidiary of ADIA co-invested as a strategic investor post-closing. The investment underscores the confidence in the long-term stability of the US industrial sector and INDUS’s role as an important asset in these sovereign wealth funds’ growing portfolios. The partnership aims to grow the business organically and through acquisitions, capitalising on the long-term, secular thesis supporting investment in industrial real estate.

Hotels and resorts

Beautiful luxury umbrella and chair around outdoor swimming pool in hotel and resort with coconut palm tree on sunset or sunrise sky

Over the years, sovereign wealth funds have actively participated in the luxury hotel market and are pivotal in financing mega tourism projects as a key component of economic diversification strategies. Approximately a decade ago, the trend for sovereign wealth funds to invest in luxury hospitality and tourism assets reached its peak with high-profile acquisitions such as the 2014 acquisition of five hotels from Intercontinental Hotels Group (IHG) by Katara Hospitality, a Qatar Investment Authority (QIA) subsidiary. In 2023, QIA returned to the fore, paying $623 million for the Park Lane Hotel on Central Park South in New York.

At the same time, sovereign development and hybrid funds continue to play a significant role in developing tourism infrastructure in their home regions. Saudi Arabia's Public Investment Fund (PIF) is investing in the development of NEOM, a mega project envisioned as a new model of sustainable living situated in the northwest of the country. NEOM, which news reports have recently suggested has been scaled back, is part of Saudi Arabia's Vision 2030 that aims to reduce the Kingdom's dependence on oil and diversify its economy, with tourism being one of the key sectors.

In 2023, sovereign wealth funds’ investments in hotels and resorts rebounded robustly following the pandemic shutdown of the global tourism industry, with a total of $2.3 billion in nine transactions, an increase from 2022’s $2 billion in four transactions. Eight of the transactions were overseas investments, and only one by a strategic fund at home, indicating that in 2023, larger saving funds saw the hotel industry ripe for recovery as travel resumed.

Sovereign development funds are perhaps focusing on managing their hospitality assets to support the local economy and appear confident that tourism can contribute to economic growth by creating jobs, stimulating local businesses, and attracting foreign investment. The involvement of sovereign wealth funds in such projects, both locally and abroad, reflects their long-term vision and role in shaping the future of the tourism industry.

Commercial Property and Development

While sovereign wealth funds appear bullish on hospitality and tourism properties, they are less keen on traditional core commercial real estate. This part of the property market is still reeling from changing work patterns and consumer behaviour following the pandemic. As such, sovereign wealth funds only made five investments in this sector in 2023 – a total of $1.3 billion, approximately half of the investment we observed the previous year. During the late 2000s and early 2010s, core commercial real estate was a central pillar of many sovereign wealth funds’ investment strategies. However, the trend has been downwards for almost a decade, falling from 33 commercial property deals in 2015.

Given the uncertainty in the commercial real estate market, our data suggests that sovereign wealth funds might be seeking to access this sector through more flexible, lower-risk vehicles, such as property developers, holding companies and real estate investment trusts (REITs), which provide regular income streams for investors. Property developers and REITs may also enable sovereign wealth funds to access the repurposing of office space into facilities such as life-science hubs that command higher rents without them having to take on the development or illiquidity risks in this evolving part of the market. Consequently, direct investments in these types of companies increased to $4.2 billion in 2023 from $2.6 billion the previous year.

Key Takeaways

The surge in real estate investments by sovereign wealth funds in 2023 – after five years of continuous declining interest in the sector – marks a significant shift in investment trends, reflecting a strategic response to prevailing market conditions and broader economic objectives. The resurgence of real estate and infrastructure investments, which comprised 40% of all sovereign wealth funds’ direct investments in 2023, underscores their growing appetite for tangible assets amid market uncertainties and inflationary pressures. Furthermore, the robust post-pandemic rebound in investments in hotels and resorts highlights sovereign wealth funds’ pivotal role in supporting large-scale infrastructure projects aimed at economic diversification and growth in their home markets. Projects such as NEOM in Saudi Arabia exemplify sovereign funds' commitment to shaping the future of the tourism industry while contributing to broader socio-economic objectives.