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SWFs could invest almost $290 bln/yr in real estate-study
LONDON Aug 24 (Reuters) - Sovereign wealth funds could invest up to almost $290 billion a year in real estate, or nearly a tenth of their assets, in the next five years as they seek to hedge their volatile source of wealth, according to a study.
The thesis, to be published by the Massachusetts Institute of Technology later this year, also found many sovereign wealth funds are preferring to invest directly in the property market.
Based on calculations using estimated asset growth and current property holdings, the paper showed that sovereign wealth funds (SWFs) could invest as much as $288 billion in real estate annually under the most optimistic projection.
Sovereign funds, which manage an estimated $3 trillion of assets globally, have been diversifying their portfolios into property and other sectors as their risk appetite has been recovering after suffering double-digit losses during the crisis.
"SWFs have a long-term investment horizon and, unlike pension funds, have no or limited liabilities. Real estate as an asset class matches the long-term investment horizon," Pulkit Sharma, a co-author of the paper and a graduate student of real estate finance and economics at MIT, told Reuters.
"It is also a hedge against inflation, a portfolio diversifier and, as proved by our study, provides a hedge against the wealth source changes."
The paper, also written by Yoohoon Jeon, showed that based on various models including correlations, UK real estate offers the best hedging potential for oil-based SWFs while Japanese property works the best for SWFs in China and Singapore.
U.S. real estate offers the best hedging potential for Korean funds.
"Considering these benefits of investments in real estate and both the high risk-adjusted returns and the hedging characteristic offered by real estate over the long term, it makes sense for SWFs to increase their allocation towards this asset class," Sharma said.
The authors, who interviewed two Middle Eastern and two Asian SWFs, found that funds generally are increasingly preferring to invest directly in the real estate market.
"SWFs have been disappointed with the performance of indirect forms of investing like commingled funds, direct investments enable them to negotiate fees aggressively and they don't face the risk of defaulting limited partners," they wrote.
The authors, having interviewed nine senior executives who are working or have worked with SWFs, found these funds are looking for deals in high-quality core assets -- such as landmark buildings or flagship hotels -- in the range of $200-500 million.
The funds are also looking at opportunities stemming from structured debt with a loan to value ratio in the range of 75 percent -- meaning borrowing up to 75 percent of the total value of the property.
Based on optimal portfoilo analysis, the paper recommended China's SWFs to allocate 20-29 percent of their assets to U.S. real estate to enhance returns.
For a related story on sovereign wealth funds, click on [ID:nLDE66710K] (Editing by Susan Fenton)
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