Sovereign property investors rich but realistic

By Sinead Cruise

LONDON (Reuters) - Sovereign wealth funds have ramped up their surveillance of European property but will not be hurried into spending and their long-term impact on the sector is unpredictable, however many billions they have earmarked to invest.

Speaking at the Reuters Global Real Estate Summit this week, some of the world's leading property experts exploded several myths surrounding sovereign funds and their ideal investment strategies.

They warned capital-starved property markets that any eagerly anticipated investment spree by state-sponsored investment vehicles from Asia, the Middle East, and elsewhere was likely to arrive later rather than sooner.

"There seems to be a lot more interest in the UK but the problem is no-one likes to buy an asset that looks cheaper in six months time, even if you see fundamental value," said James Brent, global head of real estate investment banking at Citigroup Inc (C.N: Quote, Profile, Research, Stock Buzz).

"That is what is happening with the sovereign wealth funds. They are spending a lot of time looking ... but what they won't do is invest at the wrong stage in the cycle. They are very sensitive about not being caught out," he said.

Global sovereign funds, swelled by oil revenues and foreign currency reserves, hold assets of between $1.9 trillion and $2.9 trillion, the U.S. Treasury estimates.

Analysts forecast that could rise to $15 trillion in the next eight years.

After financial institutions, real estate has been the second most popular sector for sovereign investments, accounting for 11 percent of investment allocations in 2007 and 2008 so far, according to Lehman Brothers.

While some see sovereign wealth funds as vulture or quasi-private equity investors, Chuck Leitner, global head of Deutsche Bank's (DBKGn.DE: Quote, Profile, Research, Stock Buzz) alternatives investment arm RREEF, said the funds more closely resembled institutional investors.

Explaining why sovereign funds had swooped on few British property deals so far despite an 18 percent slide in values since last summer's peak, Leitner said the sovereign funds fully understood their advantages over other players and were acting in a "measured" way.

Their most significant transactions this year include the 400 million pound ($789.6 million) purchase of British Land's (BLND.L: Quote, Profile, Research, Stock Buzz) Willis Building in London's City financial district by an investment arm of Kuwait and the 2.3 billion dirham ($627 million) acquisition of London's ExCel conference centre by the Gulf emirate of Abu Dhabi.

"They do feel like they will be in a very strong position with capital they are able to invest, in a market that probably needs capital more than it did a year ago," Leitner said.

"I haven't seen any of these guys simply go out there and react and do things that do not have a lot of thought and strategy behind them."

INVESTMENT STRATEGY

Robert Houston, who heads ING Real Estate's UK business, said sovereign investors were not all obsessed with getting trophy assets, though many who succeeded could well lock them away from the market indefinitely.  Continued...