Many sovereign wealth funds are starting to favour real estate over infrastructure as rising competition, deal execution and geopolitical turbulence cast a shadow on the asset class.
A report by US-based asset manager Invesco, polling 97 sovereign institutions, found that limited options to deploy money into riskier assets that fit their mandates is leading investors to make fewer allocation changes than at any point over the last five years.
Infrastructure, until recently seen as part of the solution to the low-interest-rate problem, has lost some of its shine after a “near-uniform tilt” by sovereign funds resulted in “supply challenges and delays”, the report states. Respondents now expect it will take them four years to reach their infrastructure allocation target, compared to 3.5 years last year.
In 2016, Invesco said, all types of sovereign investors it surveyed suffered a return gap. On average, these posted performance data about 2 percent below their return objectives. This trend further fed their appetite for alternatives – but not so much for private equity and infrastructure, due to difficulties in channelling the money.
The net beneficiary, instead, turned out to be real estate. “Investors are continuing to seek similarly attractive investment outcomes through real estate investment,” the survey said, noting that over two-thirds of sovereigns reported being overweight to global real estate in 2016, and just under half expected to be overweight again this year.
By contrast, 71 percent of sovereign investors said they were currently underweight to infrastructure due to execution challenges this year.
Still, Invesco saw these decisions as mostly tactical, formulated amid a perceived shortage of assets and rising competition for them. Within infrastructure, sovereigns were not shy to identify clear winners.
The US, in particular, drew excitement from investors, with optimism about Donald Trump’s ambition to deliver a $1 trillion infrastructure programme leading a net 40 percent of respondents to envisage being overweight to the market in 2017. Yet sovereign funds were not blind to important caveats, expressing nervousness at Trump’s protectionist tendencies and doubts over his capacity to make the plan happen.
Investors had a dim view of the UK post-Brexit, with questions over potential import taxes and market access putting a serious dent into their appetite for British assets. Those already present said they remained committed to their existing investments, however, noting that sizeable deals such as Thames Water had happened since the referendum.