Investors who want to know where the smart money is heading these days may want to follow the path of the world's sovereign wealth funds.
Lately, a growing number of those funds are chasing after Class A office buildings and five-star hotels in major U.S. cities.
The funds are massive investment pools funded and backed by foreign governments, with countries in the Middle East and Asia, as well as Norway, among the most active.
In the past year, sovereign wealth funds acquired Class A office buildings and high-end hotels in major U.S. cities, such as Six Times Square and the Mandarin Oriental hotel, both in New York, the InterContinental Chicago, the Hyatt Regency La Jolla in San Diego and a 50% stake in the CityCenter Casino and Resort in Las Vegas. Sovereign wealth funds also invested in private-equity firms such as The Blackstone Group of New York and The Carlyle Group of Washington.
More recently, another sovereign wealth fund, the Abu Dhabi Investment Council in the United Arab Emirates, was reported to be in talks to buy up to 90% of the historic Chrysler Building in New York.
A number of factors have made real estate an attractive target for the funds, especially for those in the Middle East. First, surging crude oil prices have flooded them with cash.
"You've got oil at $137 a barrel. They're making a lot of money and their wealth is growing," said Guy Langford, an accounting principal and co-leader of the U.S. national real estate mergers and acquisitions practice at Deloitte & Touche LLP of New York.
WEAK DOLLAR
At the same time, the weak U.S. dollar, the shutdown in the commercial-mortgage-backed securities market and declining real estate values offer "the perfect storm" for sovereign wealth funds' investment in real estate, he said.
Mr. Langford estimated that the equity real estate investment trusts are trading at an 8.4% to 20% discount to net asset value, which makes real estate appear cheap. At the same time, private-equity funds, which had been pouring capital into the REIT sector over the past few years, are sitting on the sidelines as a result of the credit crunch, he said.
"So these factors create opportunity for a SWF," Mr. Langford said.
Also, real estate allows these funds to stay low-key.
"This is an industry that prefers to do business quietly and with minimum public disclosure," said Jeffrey Schwartz, chairman and chief executive of Denver-based ProLogis and vice chairman of the National Association of Real Estate Investment Trusts in Washington.
The assets of all sovereign wealth funds total $3 trillion, more than hedge funds and private-equity players combined, Mr. Langford said.
What's more, the funds are expected to quadruple in size by 2012, David Marchick, managing director of The Carlyle Group, predicted this month during NAREIT's 2008 Investor Forum in New York.
The murky funds, which disclose little about their investment strategies, hit mainstream America's investment radar last year when they began snapping up stakes in large financial institutions. Asian and Middle Eastern sovereign wealth funds, in particular, became knights in shining armor, swooping in to take ownership interests of up to 10% in cash-hungry financial services firms such as Citigroup Inc. and Merrill Lynch & Co. Inc., both of New York, and UBS AG of Zurich, Switzerland, which were caught up in the credit crunch.
The cash injections were a godsend for banks that were struggling with writedowns related to the subprime debacle.
The funds tend to come under greater scrutiny when taking stakes in financial services firms or defense and security-related companies than in real estate, making real estate a less problematic investment, said Laine Kenan, executive director of Arcapita Inc., an Atlanta-based private-equity investment firm that works with sovereign wealth funds.
When a state-owned Arab company, Dubai Ports World of the United Arab Emirates, bid to acquire the operating rights to several U.S. ports in 2006, a huge controversy erupted on Capitol Hill, and politicians angrily questioned and then rejected the idea of placing U.S. ports in the hands of a company from the Middle East.
Sovereign wealth funds tend to invest in real estate for the long haul, Mr. Kenan said, while private-equity funds prefer to buy, refurbish and then exit a property in three to five years.
"They're extremely sophisticated" investors, said Barden Gale, vice chairman of real estate at Starwood Capital Group in Greenwich, Conn.
Increased interest by sovereign wealth funds is a vote of confidence in the future of real estate, said Hap Stein, chairman of NAREIT and chief executive of Regency Centers, a retail REIT in Jacksonville, Fla.
E-mail Janet Morrissey at [email protected].
