Once The World’s Biggest Real Estate Investor, ADIA Pivots Strategy To Stay Relevant

The Abu Dhabi Investment Authority’s real estate strategy used to be simple and could be reduced to one word: diversification. The huge Middle East sovereign wealth fund bought retail and office properties in major global cities and that was enough to make it the largest real estate owner in the world.

However, over the past five years, things have not been so easy due to the changes in the marketplace and the unique problems of this particular giant, namely the constant exodus of top management.

Now it has decided to swivel.

A strategy document tacitly posted on the opaque fund’s website last month indicated a strategic revision. It suggests that ADIA is moving away from a strategy that seeks to diversify the real estate market and moving closer in ethos to large private equity funds like Blackstone and Carlyle. According to the document, it plans to pick a few strategies and make them big. And where ADIA is going, other sovereign wealth funds often follow.

Abu Dhabi, home of the third largest sovereign wealth fund in the world.

“In previous cycles, we had managed to build a broadly diversified and well-distributed real estate portfolio, both from a subsector and geographic perspective,” said ADIA Deputy Director of Real Estate and Infrastructure Salem Al Darmaki in the strategy paper.

“Through extensive internal research and analysis of global trends, we have identified up to seven macro-thematic strategies, such as the digitization of society, in which we see long-term opportunities. These topics will determine our investment activity in the years to come. “

That top-down view is fused with high-conviction bottom-up investment ideas, Al Darmaki added. This means that the geographical and industry-specific knowledge of the ADIA teams as well as the relationships with specialized partners are used to search for very specific values ​​in market-specific opportunities.

“This is about aligning our investment activities more directly with our future prospects on a more granular level while maintaining the flexibility to seize market opportunities,” said Al Darmaki.

ADIA declined to comment on Bisnow’s questions about its revised property strategy.

In the wake of the 2008 financial crisis, ADIA was at the forefront of one of the big changes in the decision of large pension funds and sovereign wealth funds to invest in real estate. In the run-up to the crisis, large institutions like this one gave a significant portion of their real estate assignments to fund managers to invest on their behalf.

But these investments often performed poorly in the post-Lehman recession. Crucially, the institutions have been unable to guide decisions made by managers after the money was turned over and control was relinquished.

ADIA and other similar funds, such as the Dutch pension fund APG and the Norwegian Norges Bank Investment Management, decided to create in-house teams that invest directly on their own behalf or in joint ventures with industry specialists.

For ADIA, this strategy made it possible to use a significant part of the revenues from its oil reserves and to build on an already large real estate portfolio. The fund doesn’t publish exact numbers, but Global SWF estimated its total assets under management at $ 849 billion at the end of 2020, making it the third largest wealth fund in the world.

According to PERE magazine, real estate is owned by US $ 49 billion, making it the third largest real estate owner in the world (in contrast to investment managers like Blackstone or Brookfield) behind APG and the German insurance company Allianz.

But that number dropped her from the top for the first time in recent years. Not being the biggest isn’t a bad thing in itself, but it does show that ADIA has had a tough time in the asset class over the past few years.

PERE revealed in an analysis of ADIA’s real estate strategy that Tom Arnold, ADIA’s global real estate director, had run the company for the past 18 months along with America boss Gerald Fang, Europe boss Pascal Duhamel and incumbent Asia boss Anthony Bertoldi has left. All of these positions are still open.

The Queensmere Mall in Slough, part of ADIA’s development plan

PERE also noted that ADIA has been a net seller of direct property purchases every year since 2015, citing data from Real Capital Analytics, and has not made a single direct purchase in 2020 and 2021.

However, that doesn’t mean it hasn’t invested, and the investments made show how it changes both the strategy of where and how it invests.

In its strategy paper, ADIA pointed out that direct real estate transactions, be it solo or in joint ventures, are no longer in the foreground.

“We are agnostic about the best route to access for each occasion,” said Al Darmaki. “We can reinforce one of our beliefs by investing in public or private equity or debt – or a combination of all four. We do not have pre-allocated budgets for direct, indirect and publicly traded investments and instead are guided by what makes most sense in each situation on a global relative value basis. “

As an example, Al Damarki said that as stock markets fell at the start of the pandemic, ADIA saw value in real estate stocks and bought heavily.

“For example, when the public markets fell sharply at the start of the Covid-19 pandemic, we were able to move quickly and at scale into publicly traded opportunities, capitalize on the shift between public and private markets, and make a number of significant investments in our focus areas,” he said .

Like private equity firms like Blackstone and Brookfield, Al Damarki said ADIA will close a smaller number of larger deals in sectors where it has strong beliefs.

He didn’t name specific sectors, but the fund’s annual report pointed to recent investments in a Chinese logistics platform managed by Prologis and Indian mortgage lender HDFC. According to PERE, ADIA has invested in Gaw Capital’s Asian data center business, IDC, and more than 500 million.These allocations don’t necessarily show up in transaction numbers, but suggest that ADIA is still investing new money in real estate, just in different ways than before .

Life sciences and housing were two of the other investment themes ADIA mentioned in its annual report. In the UK, it is running a mixed-use project in Slough, 25 miles west of London, which includes the construction of 2,500 homes, 334,000 SF retail and 538,000 SF offices on 14 acres previously used by two shopping centers.

The scheme shows that ADIA, like many investors, is suspicious of the future of offices and is far more optimistic about residential real estate. An earlier iteration of the plan before the pandemic required 1,100 new homes and between 1.8 million and 2.3 million SF offices.

“While it is too early to fully assess the long-term impact of the rapid changes in consumer behavior caused by the pandemic, the risk of asset obsolescence has increased significantly for real estate investors,” ADIA said in its annual report. “Early evidence suggests that accelerated shifts to more remote working and online shopping, along with less international travel, are permanent changes, the extent of which is still difficult to determine.”