Sovereign Wealth Fund Institute

In the midst of troubling economic times, the skyline of Milan is rising. As Italy’s financial hub, Milan is home to the Italian Stock Exchange. The government of Qatar is keen on Italian real estate developments, especially mixed-used projects in highly-trafficked zones. Qatar Holding LLC, the sovereign wealth enterprise of the Qatar Investment Authority (QIA), is purchasing a 40% stake in Milan’s minted Porta Nuova business district through a subscription of newly issued shares. The Porto Nuova district is undergoing a massive economic renewal that will connect to Milan’s oldest business district, bordering Centro Direzionale di Milano. [Content protected for Sovereign Wealth Fund Institute Standard subscribers only. Please subscribe to view site content.]

Construction projects in Dubai were deeply affected by the real estate slump. The Investment Corporation of Dubai continues its efforts to support the local Dubai real estate industry. The Investment Corporation of Dubai and Brookfield Asset Management are hoping to lockdown $500 million in financing to launch a real estate fund dubbed the ICD-Brookfield Dubai Real Estate Fund. The original target amount was $1 billion. The fund would be used to recapitalize frozen real estate projects in Dubai. The announcement of the fund’s creation was in October 2011.

LondonMetric Property Plc is a real estate investment trust (REIT) that was created from a merger between Metric Property Investments Plc and London & Stamford Property Plc. The UK-based REIT is in discussions to sell £275 million in distribution warehouses across England to the €2.4 billion joint venture managed by Prologis and backed by Norges Bank Investment Management (NBIM).

The warehouses are occupied by third-party logistic operators. The assets are held in a joint venture between LondonMetric Property and Green Park Investments, a Middle-Eastern group.

London & Stamford sold its jointly owned Meadowhall shopping centre to Norges Bank Investment Management in the Fall of 2012.

The mega-sized sovereign wealth funds have the characteristic of lower cost of capital compared to small to mid-sized pensions and private investors. The China Investment Corporation (CIC) purchased the Winchester House located in London for £245 million. It was their first direct real estate investment in the London. [Content protected for Sovereign Wealth Fund Institute Standard subscribers only. Please subscribe to view site content.]

Ireland’s National Asset Management Agency (NAMA) has sold a portfolio of Irish commercial property loans to a new joint venture. The joint venture is 80% owned by a consortium of private investors led by Starwood Capital Group and the rest by NAMA. Other consortium members include Key Capital Real Estate and Catalyst Capital.

The loan portfolio backs 30 office and retail properties. It was sold for around €200 million, 25% of its original value of €800 million. NAMA provided a senior secured vendor finance loan to the joint venture.[Content protected for Sovereign Wealth Fund Institute Standard subscribers only. Please subscribe to view site content.]

According to the press release, “Canada Pension Plan Investment Board (CPPIB) announced today it has formed a new 50%/50% joint venture with Hammerson to acquire a 33.3% stake in Bullring Shopping Centre for £307 million from the Future Fund.

The ownership of Bullring is now held 50% by Hammerson (this 16.7% isin addition to its 33.3% existing stake), 16.7% by CPPIB and 33.3% by the Henderson Shopping Centre Fund. CPPIB has a small indirect interest in Bullring through its investment in the Henderson Shopping Centre Fund.

‘This transaction provides CPPIB with further scale and opportunity in Bullring and is in line with our U.K.retail strategy of investing in high quality assets in major locations with strong growth potential,’ said Graeme Eadie, Senior Vice-President and Head of Real Estate Investments, CPPIB. ‘We are pleased to expand our relationship with Hammerson, one of Europe’s leading retail property companies, whom we know well having worked together successfully on other investments.’

Located in Birmingham, Bullring is one of the U.K.’s top ten retail destinations with 167 tenants including high-quality fashion and catering brands. Anchored by Selfridges and Debenhams, it is over 99% leased and attracts some 40 million shoppers per year. It continues to attract leading domestic brands, expanding international retailers, and high-end restaurants and cafésto Birmingham. Hammerson will continue to have responsibility for asset management and development for the centre.

‘This is an excellent opportunity to enhance our position in one of the U.K.’s strongest shopping destinations at an attractive entry price,’ said David Atkins, Hammerson Chief Executive. ‘Bullring is an iconic centre which has performed extremely well since opening in 2003, and I am confident in the continued future success of Bullring as consumer demand for venues which offer exceptional experiences continues to rise.’”

Read more: CPPIB Press Release

Oxford Properties Group has purchased King Edward Court, 10 Paternoster Square in London for £235 million from Mitsubishi Estate Company. King Edward Court which is 246,000 square feet houses the London Stock Exchange – their main tenant. The exchange’s lease expires in September 2028. Oxford Properties was keen on purchasing property in London’s city core. The lease covenant with the London Stock Exchange made the transaction more attractive. Oxford Properties also has St. Martin’s Court in their investment portfolio.

Oxford Properties is the real estate arm of OMERS.

The Kuwait Investment Authority is investing in the Hudson Yards office property project in Manhattan. The US$ 15 billion, 26-acre office, retail and residential development project lies on Manhattan’s far West Side. It is the biggest undeveloped property in Manhattan.

Getting the mega project off the ground was challenging for the Related Companies as their initial partner, Goldman Sachs Group Inc. dropped out. In addition, the effects of the global financial crisis put strain on raising funds and getting funding from the major banks. In 2010, Oxford Properties Group, the real estate investment and development arm of Ontario Municipal Employees Retirement System (OMERS) bought a 50% interest in Hudson Yards. They invested alongside Related Companies. Related Companies and the Oxford Property Group became the general partner for the project.[Content protected for Sovereign Wealth Fund Institute Standard subscribers only. Please subscribe to view site content.]

NSW Treasurer – Mike Baird

Composition of the NSW Ports Consortium

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The Abu Dhabi Investment Council (ADIC) along with Finchatton, an international property developer, purchased 20 Grosvenor Square, Mayfair for £250 million. Finchatton confirmed arrangement for them to assist in the redevelopment of 20 Grosvenor Square. A consortium led by Richard Caring, the restaurant owner-turned property developer, put 178,000 square feet worth of space for sale. Richard Caring and the consortium bought the building in 2007 and had plans to convert the block into luxury apartments. He beat out bids from 38 other parties including Grosvenor and Christian Candy’s CPC Group.

20 Grosvenor Square is a former headquarters of the United States Navy. During World War II, it was U.S. President Dwight Eisenhower’s military headquarters.

Over the past eleven months, an incredible amount of institutional capital has flowed to single-family homes. Colony Capital, the Blackstone Group, KKR, REITs and other asset managers are betting on single-family home rentals. Some of the capital being raised for these real estate funds are coming from public investors like Alaska’s Permanent Fund Corporation and the California State Teachers’ Retirement System (CalSTRS). Most of the asset managers like Blackstone and KKR are focusing on areas like California, Arizona and Nevada which have a higher concentration of ready-to-rent homes. For example, the Blackstone Group owns around 10x as many rental homes in the Sacramento region compared to any other private landlord. The firm pays about US$ 164,000 per house in the region and acquired more than 1200 in the past eight months.

Public investors see potential to earn big returns from the foreclosure crisis in investments habitually dominated by small investors.

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The press release states, “State Corporation “Bank for Foreign Economic Affairs” (Vnesheconombank), The Russian Direct Investment Fund (RDIF), China Investment Corporation (CIC) and The Russia-China Investment Fund (RCIF) have today signed a Memorandum of Understanding (MOU), which sets forth a number of principles to promote future cooperation on investments into infrastructure projects and projects in the Russian Far East Region.

Parties have set out three main investment themes that will provide the foundation for a range of future investments in the region. Investments will be focused on projects with growing demand for new infrastructure, logistics, as well as high value-added development and processing of natural resources, and leading manufacturing and services companies with strong credentials.

The signing ceremony took place in Moscow today in the presence of the Russian President Vladimir Putin and the President of the People’s Republic of China Xi Jinping.

Vladimir Dmitriev, chairman of Vnesheconombank, said: “Together with our partners in China we have been financing Russian-Chinese development projects in priority sectors of the economy. These are primarily technology, innovation and energy efficiency amongst others. Our partnership is an important step towards greater economic cooperation between Russia and China.”

Kirill Dmitriev, CEO, The Russian Direct Investment Fund (RDIF) commented: “This opportunity will help to further attract long-term investments into the Russian economy, and will concentrate on investment and development of Russia’s Far East, including the implementation of large-scale infrastructure projects.”

Gao Xiqing, Vice Chairman and President, China Investment Corporation (CIC) said: “This memorandum gives further impetus to the ongoing cooperation between CIC and its partners in Russia to jointly seek investment opportunities with attractive returns and win-win solution”.

Hu Bing, Co-CEO, The Russia-China Investment Fund (RCIF) commented: “Today’s memorandum marks another significant step for the Russia-China Investment Fund. The growing demand for infrastructure in the Russian Far East offers excellent opportunities to deliver on the objectives set out in the memorandum to promote economic development and to achieve strong risk-adjusted returns for our investors”.

State Corporation ‘Bank for Development and Foreign Economic Affairs (Vnesheconombank)’ was established in spring 2007 in accordance with the Russian Federal Law “On the Bank for Development” on the basis of Vnesheconombank USSR. The Bank’s activity is designed to remove economic growth infrastructure restrictions, modernize and boost non-raw materials economy, high-technology industries as well as to stimulate innovations and the export of high-tech products and implement projects in the special economic zones, projects in environment protection, provide support for small and medium-sized enterprises.”

Read more: Russian Direct Investment Fund Press Release

Public investors are in search for stable cash flows and are willing to buy and hold industrial properties for the long-term. This property trend includes partnering or investing in real estate companies that possess expertise in institutional real estate. These real estate companies gain by shoring up their capital base. Earlier in 2012, the China Investment Corporation and the Canada Pension Plan Investment Board were involved with investments with Global Logistic Properties. Over to Europe, Prologis announced the closing of their €2.4 billion joint venture called Prologis European Logistics Partners Sarl (PELP) with Norges Bank Investment Management. The 50:50 joint venture acquired a portfolio of 195 Class-A logistics facilities wholly owned by Prologis.

In the United States, the California Public Employees’ Retirement System (CalPERS) has created a partnership with Bentall Kennedy to pursue U.S. core industrial properties. [Content protected for Sovereign Wealth Fund Institute Standard subscribers only. Please subscribe to view site content.]

The Caisse de dépôt et placement du Québec will invest AU$32 million in Melbourne’s Centre for AgriBioscience under an agreement with Plenary Group. Plenary Group is an investor, developer and operator of public infrastructure. The Centre for AgriBioscience is a joint venture between the Victorian State Government and La Trobe University. The center will include research laboratories, greenhouses and offices that will be used by more than 400 researchers.

“This investment in a social-infrastructure project enables us to increase our presence in Australia, a market presenting great business opportunities,” said Macky Tall, Senior Vice-President, Infrastructure, at the Caisse de dépôt et placement du Québec. “Because these projects are carried out under 15-, 20- or even 30-year agreements, they enable us to generate stable, predictable returns for our depositors over the long term.”

The board of trustees at the Alaska Permanent Fund Corporation (APFC) amended guidelines for investing in infrastructure. Listed infrastructure is now an allowable infrastructure investment which will increase liquidity in the infrastructure portfolio. The board also approved the co-investment process for infrastructure investments.

According to APFC’s press release, “Our internal staff has put together a detailed review process for analyzing infrastructure co-investment opportunities that ensures each investment will see a thorough review,” said Board Chair Bill Moran. “In fact, they already applied this process to a recent investment and declined it. It gives the Board confidence in our investments when the staff is willing to say no to one that is not quite right for the Fund.”

Currently all infrastructure investments are made through pooled funds. To date, the APFC board has made US$ 1.7 billion in commitments to infrastructure. As of December 31, 2012, APFC’s infrastructure holdings were valued at US$ 792 million.

In June 2011, the Royal Bank of Scotland Group Plc (RBS) took control of 42 Marriott-branded hotels in England, Scotland, and Wales. They assumed control of the £1 billion property portfolio following loan defaults. At the time, RBS owned £700 million of debt which was used to finance the purchase in a syndicated loan structure. The additional loan was originally owned by Lehman Brothers and was acquired by York Capital, a hedge fund entity.

It looks like RBS has found a buyer after entertaining several bids, the Abu Dhabi Investment Authority (ADIA) which is planning to buy the 42 Marriott-branded hotels for £640 million. The hotel portfolio includes the Marriott Country Hall on London’s South Bank, St Pierre Hotel, Dalmahoy Hotel, and the Heathrow Marriott.

The State Oil Fund of Azerbaijan (SOFAZ) is looking to acquire core real assets in Australia, particularly Sydney. Australia has been a noteworthy real estate market for a number of sovereign wealth fund property investors. Australia has access to Asian nations and has robust transparency in property markets. Office and retail properties have been targets for foreign investors.

SOFAZ has moved forward with real estate purchases in cities such as London, Paris, and Moscow.

According to the press release, “The Norwegian Government Pension Fund Global bought 49.9 percent of five office properties in the US, its first investment in the world’s largest real estate market, through a joint venture with TIAA-CREF.

The assets in New York City, Washington D.C. and Boston are valued at $1.2 billion, or about 6.6 billion kroner. TIAA-CREF, the seller, retained 50.1 percent of each property and will manage the buildings on behalf of the partnership. The transaction was completed on Feb. 8.

“This is the fund’s first real estate investment outside of Europe and is in line with our strategy to build a high-quality, global property portfolio,” says Karsten Kallevig, chief investment officer for real estate at Norges Bank Investment Management (NBIM), the fund’s manager. “We are very pleased to team up with a partner that has TIAA-CREF’s knowledge and capabilities, and look forward to jointly developing the venture.”

The properties consist of 1.9 million square feet (172,450 square meters) of rentable space. Two of the properties are located in New York City, two in Washington D.C. and one in Boston. The joint venture will seek to acquire additional office properties, primarily in these three cities.

“As the world’s largest real estate market, the US will be an important part of the fund’s long-term property portfolio,” Kallevig says. “We will initially seek to invest in key east-coast cities.”

The fund made its first real estate investments in 2011 in office and retail properties in London and Paris. It is mandated to hold 60 percent in equities, 35-40 percent in fixed income and as much as 5 percent in real estate.”

Source: Norges Bank Investment Management

Properties:
Washington D.C. (representing 37 percent of the five properties’ gross rentable space): Properties located at 1101 Pennsylvania Avenue and 1300 I Street.

Boston (33 percent of gross rentable space): Property located at 33 Arch Street

New York City: (30 percent of gross rentable space): Properties located at 470 Park Avenue South and 475 Fifth Avenue

The press release states, “Laxfield Capital, the commercial mortgage origination, investment management and advisory business, today announced the launch of a new UK commercial lending programme.

The programme will invest up to £1 bn in UK commercial mortgages over the next 24 months. The real estate arm of the Government of Singapore Investment Corporation (GIC) has provided initial investment in the programme.

The Laxfield Capital programme will provide individual loans of between £40-£185 mln, 5-7 years duration and up to 75% loan-to-value (LTV) to a wide variety of commercial property sectors, including office, retail, industrial, residential and leisure across the UK.

The programme will provide whole loans and syndicate up to 75% of each mortgage to other preferred investors. GIC will retain a substantial junior investment in each loan.

Adam Slater, Managing Director of Laxfield Capital, said: “The Laxfield Capital programme will fill a gap in the large-ticket commercial mortgage sector as few lenders are currently able to provide whole loans in excess of £100m at up to 75% LTV, particularly outside core locations or prime assets. I believe the programme will have a considerable impact on the UK property market with a significant injection of liquidity at a time when traditional sources of funding are contracting. This is a good example of how alternative sources of capital are successfully entering the space traditionally dominated by banks. The investment from GIC is a strong vote of confidence in our programme and in UK commercial mortgages, and provides an ideal market entry point for other investors seeking access to quality mortgage investments. “

Chris Morrish, regional Head of Europe, GIC real Estate, said: ‘We look forward to our partnership with Laxfield Capital, which has demonstrated strong capabilities in loan origination and has generated value for commercial mortgage investors.

The programme complements our existing direct junior debt investment strategy which we will continue to pursue.’”

Read more: Laxfield Capital Press Release

Regulatory risk is a significant risk when investing in energy infrastructure. Policymakers can enact legislation, impacting the return on investment and increase liabilities. The Norwegian Ministry of Petroleum and Energy is proposing cutting tariffs to ship gas through its pipelines by 90%. This proposed reduction would apply to new contracts. Major areas of the Gassled system are booked for years. Cash flow implications will occur, especially in the long run.

It is nearly impossible to have proper due diligence in energy infrastructure when there will be future political change in regulatory or legislative regimes.

Public investors have spent billions buying stakes in Gassled over the past few years. [Content protected for Sovereign Wealth Fund Institute Standard subscribers only. Please subscribe to view site content.]