Sovereign investors seek opportunities in real estate and China

Chinese assets and illiquid alternatives such as real estate are expected to be focuses for sovereign investors in the coming years, according to Invesco.
Sovereign investors seek opportunities in real estate and China

After a year of liquidity pressures to pay for drawdowns, central banks and sovereign wealth funds stand to gain the illiquidity premium of real estate and are looking to increase allocations to China, according to a new report. 

The study, Invesco’s ninth annual Global Sovereign Asset Management Study released on Monday (July 12), was written based on the views and opinions of 141 senior executives at 82 sovereign wealth funds and 59 central banks, totalling $19 trillion of assets under management.

The report found that fixed income allocations fell year-on-year in 2021 from 34% to 30% while cash and equity allocations rose five and two percentage points respectively.

The shift towards cash among global asset owners was mostly attributed to the need for liquidity to pay for drawdowns during the Covid-19 pandemic, Terry Pan, Invesco’s chief executive for Greater China, Korea and Southeast Asia told AsianInvestor.

However, this does not indicate strategic changes, he said. After drawdowns, the allocations in the other asset classes will be adjusted as the percentage shifts.

"From what I have seen and what our clients have told us, is that strategically, the shifts in where they're making an active choice to increase asset allocation, is in alternatives. They can always find equity and fixed income exposure, but the challenge has been really low to negative yield," he said.

“In the alternative space, it's not about the willingness to invest, there's definitely a strong will and interest to put more money into illiquid, possibly higher-yielding return type investment," he noted.


Allocations to liquid alternatives held steady at 4% while illiquid alternatives, which include property, infrastructure and private equity, fell marginally from 20% to 19%.

More specifically, allocation to hedge funds or absolute return funds rose from 3.1% to 3.9%, while real estate fell from 9.0% to 8.3% and commodities halved from 1% to 0.5%.

However, even though real estate allocation fell from 2020's numbers, the report pointed out that it has increased the most since 2015, when only 4.1% of portfolios were allocated to property.

“The beauty of sovereign investing, because of the time horizon, is that they can take on these asset classes, and they can bear the liquidity and, hopefully gain the illiquidity premium that these assets offer,” Pan said.

Source: Invesco

Pan also noted that Covid has influenced a shift in the type of real assets investors are looking to buy.

“Clearly, there's an ESG (environmental, societal and governance) theme on real estate; the view on retail – not many sovereign investors are looking to buy shopping malls, or retail blocks with the continuation of e-commerce and digital consumption, the evaluation retail is going to be tough,” he said.

There are signs that Covid may have changed behaviour permanently, he added, and he expects logistic centres, which have grown in popularity particularly in Asia since last year, to continue to be a draw for investors in the long term.

“Still, location is key, it’s simple to build. And the tenants that you sign, they don't sign for three, five years, they sign for decades, 10-plus year type of leases, because some of the logistics centres are built for purpose,” he said.

A majority (48%) of the sovereign investors currently rely on external managers to invest in real estate, while 25% prefer a hybrid, and 27% use only internal teams, according to the report.

However, the internalisation of real estate investing is set to grow as more than half (55%) are planning to expand their internal real estate teams particularly in the Middle East (87%) and Asia (70%).


Only one sovereign wealth fund said it was looking to decrease allocation to China in the next five years, while 58% said there would be no change and 40% said an increase is expected.

“There is no way you can ignore this market,” one North American liability sovereign said. “Even with this geopolitical environment, China still offers the largest market for sustainable energy, infrastructure, and an abundance of development property and luxury lodging opportunities.”

Political risk was highlighted as the most significant obstacle to China investment, according to 86% of respondents, followed by limited convertibility of the RMB currency (50%), and ESG concerns such as lack of data (45%).

Pan noted that investors have been showing increasing interest in the RMB currency, equity and fixed income.

“The fact that the Bond Connect, for example, in Hong Kong would make the bond market more accessible makes China fixed income more appealing as an asset class. Have they invested a lot in the year? No. Do they get all the information that they need to invest in it, that to make them comfortable invest in it? maybe not. But it is becoming more accessible,” Pan said.

He added that this highlights the need to conduct the “right credit research that would offer some value to the investor looking at that space as a diversifier as an alternative source of income.”

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