Sovereign wealth fund invigorating real estate markets

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I wonder if you guys have heard of a financial terminology “sovereign wealth fund”. You should have heard about it from somewhere but did not bother to concern. From now on I recommend you to do so from now on because sovereign wealth fund is taking center stage of financial markets around the world.

First, let’s find out what a sovereign wealth fund (SWF) is. SWF is a nation or state-owned investment fund composed of financial assets such as stocks, bonds, property, precious metals, or other financial instruments. Sovereign wealth funds invest globally. Most SWFs are funded by foreign exchange assets. So who manages these SWFs? As it is mentioned in the definition, it is managed by central banks.

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In 2003, approximate volume of SWFs was 1.5 trillion dollars worldwide but in 2012 the volume was increased to 5.2 trillion dollars, roughly showing 3.5 times rate of growth. SWF has been exerting its influence in delivering capital to international financial markets and conspicuously it is being invested in real estates. In 2012, SWF’s direct investment in real estate properties is 100 billion dollars showing rapid growth of 36% from the previous year and lots of renowned investment banks are forecasting that its growth will increase by two folds in 10 years. The reason why SWF is being invested in estate properties is because after the outbreak of global financial crisis which led to deterioration of financial instruments’ rate of returns, investors have started looking for stable returns and instruments that can hedge inflation.

From now on, let’s find out why the real estate properties are receiving attentions.
The reason why SWF was able to grow in such a rapid speed is because oil-producing companies’ financial revenues have grown a lot along with great increase in rising nations’ foreign exchange holdings. During the past 3 years, SWFs grew at a rate of 3.5%. The proportion of SWFs in global asset management companies accounts for 5.4% which also showed a growth rate of 1.3% since 2007. Such trend led to the increase of overall volume of entire hedge funds (HF) and private equity funds (PEF).

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So what is the reason SWF has been increasing its investments in real estates? First reason was to diversify investment portfolio. Just like any other operating funds it also has been invested in stocks and debentures. The reason why nations all around the world and renowned asset management companies are focusing on SWFs is because there is a serious need of diversification in investment portfolio as numerous financial instruments are showing terrible rate of returns. The measurements made on global financial markets were “cheap money policy” and “low growth rate”, due to these policies investors’ expected rate of return to decrease which obviously led them to stability. Another reason would be that investing in real estate properties enables risk diversification and inflation hedge as real estate properties show a low interrelationship with financial assets.

Now you should know what investors are eager to invest in real estate properties! From now on, let’s figure out 4 distinctive characteristics of investments made on real estate markets.

1) Investors prefer real estate properties of countries that are showing a high restoration rates in financial markets.
Investors that are thinking of long-term investments prefer estate markets that will be recovered in few coming years rather than the markets that are intensively invested currently. That is why the United States (major gateway cities) is receiving all the focus from investors as cities like London and France are already highly populated.

2) Investors focusing on distressed assets
Global investment companies are focusing on distressed assets around the world especially those of Southern Europe. They are distressed assets but they can provide opportunities to purchase them in a cheap price. This phenomenon is highly animated in Europe as European banks are disposing its distressed debts (debentures).

3) Diversification in estate properties’ portfolio
Sovereign wealth fund has been being invested in industrial complexes or school facilities which are not the traditional investing targets. It is said to be that investors do not usually invest in estates such as domes, woods, and forests but investors are turning their eyes on these. Asset management companies say that these strange phenomena are contributed by strategic goals as those targets can provide risk hedges and procurements in resources.

4) Investing in early stages of large-scale industry
Lots of experts say that cases in investing in the Middle East are increasing. Investing sovereign wealth funds in a joint-collaboration projects with companies that have abilities of development and operations

By now, you should have understood how sovereign wealth funds are valued in global financial markets. Its value is rising day by day and its usage is also endless. But there are worries saying that they are overspending assets when they do not have practical appraisal systems. Also, they should be extra careful when investing in distressed debentures and assets actively being traded in European countries.

Kwon Hyokhee (kwonhyokhee@naver.com)

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