Sovereign investors seek opportunities in real estate and China | Alternatives

After a year of liquidity pressure to pay for drawdowns, central banks and sovereign wealth funds will receive the illiquidity premium on real estate and aim to increase the allocation in China, according to a new report.

Invesco’s ninth annual Global Sovereign Asset Management Study, published on Monday (July 12), is based on the views and opinions of 141 executives at 82 sovereign wealth funds and 59 central banks with $ 19 trillion in assets under management.

The report found that the allocation of fixed income securities decreased from 34% to 30% year over year in 2021, while the cash and equity allocation increased five and two percentage points, respectively.

The shift towards cash among global wealth owners has been largely attributed to the need for liquidity to pay for borrowings during the Covid-19 pandemic, Terry Pan, Invesco’s CEO for Greater China, Korea and Southeast Asia, told AsianInvestor.

However, this does not indicate strategic changes, he said. After utilization, the allocations in the other asset classes are adjusted as percentage shifts.

“From what I’ve seen and what our clients have told us is that the shifts in which they make an active decision to increase asset allocation are strategic in alternatives. You can always find exposure to stocks and fixed income, but the challenge was really low to negative, “he said.

“The alternative space is not about willingness to invest, there is definitely a strong will and interest to invest more money in illiquid, potentially higher-yielding assets,” he noted.

ALTERNATIVES SHIFT

The allocation to liquid alternatives remained constant at 4%, while illiquid alternatives, which include real estate, infrastructure and private equity, decreased slightly from 20% to 19%.

Specifically, the allocation to hedge funds or absolute return funds rose from 3.1% to 3.9%, while real estate fell from 9.0% to 8.3% and commodities halved from 1% to 0.5%.

Although real estate allocation has declined from 2020 numbers, the report notes that it has increased the most since 2015, when only 4.1% of portfolios were allocated to real estate.

“The beauty of government investing, because of the time horizon, is that it can embrace these asset classes, carry the liquidity, and hopefully earn the illiquidity premium that these assets offer,” said Pan.

Source: Invesco

Pan also pointed out that Covid has influenced a shift in the types of real assets investors want to buy.

“Of course there is an ESG (environmental, societal and governance) issue in real estate. the retail perspective – not many sovereign investors want to buy malls or retail blocks with the continuation of e-commerce and digital consumption, retail valuation will be difficult, “he said.

There are signs that Covid has changed behavior in the long term, and he assumes that logistics centers, which have gained popularity, especially in Asia, since last year, will also be a long-term attraction for investors.

“Still, location is key, it’s easy to build. And the tenants you sign are not signing leases for three, five years, but for decades, over 10 years because some of the logistics centers were built for a specific purpose, ”he said.

A majority (48%) of government investors currently rely on outside managers to invest in real estate, while 25% prefer a hybrid and 27% only use in-house teams, the report said.

However, the internalization of real estate investments will increase as more than half (55%) plan to expand their in-house real estate teams, particularly in the Middle East (87%) and Asia (70%).

CHINA INTEREST

Only one sovereign wealth fund said it wanted to decrease its allocation in China over the next five years, while 58% said there would be no change and 40% said an increase is expected.

“You definitely can’t ignore this market,” said a North American sovereign liability officer. “Despite this geopolitical environment, China still offers the largest market for sustainable energy, infrastructure and an abundance of development real estate and luxury accommodations.”

Political risk was cited as the top barrier to investing in China, according to 86% of respondents, followed by the limited convertibility of the RMB currency (50%) and ESG concerns such as lack of data (45%).

Pan noted that investors were increasingly interested in the RMB currency, stocks and fixed income securities.

“The fact that Bond Connect would make the bond market more accessible in Hong Kong, for example, makes China Fixed Income more attractive as an asset class. Did you invest a lot in the year? Are you getting all the information you need to invest in, so that you can invest in it conveniently? maybe not. But it’s getting more and more accessible, ”said Pan.

He added that this underscores the need to “conduct the right credit analysis that would provide some value to the investor viewing this area as a diversifier as an alternative source of income”.