Sovereign Wealth Funds Love Real Estate — Would A U.S. Version Pile Into The Sector?

The possibility of a U.S. sovereign wealth fund is a hot topic right now.

Republican presidential candidate Donald Trump floated the possibility of a U.S. wealth fund in a speech on Thursday. The following day, Bloomberg reported that President Joe Biden's administration has also been kicking the idea around for the past few months. 

Sovereign wealth funds are major investors in real estate, making big moves since the 2008 financial crisis, in particular — so could a fund of this sort bring a large new investor into the real estate world?

Here’s everything you need to know. 

What is a sovereign wealth fund?

Sometimes countries have budget or revenue surpluses. Countries like Norway and Abu Dhabi make more from selling oil than they spend in their annual budget. China and Singapore have large amounts of foreign reserve capital because tight controls on capital flows mean more foreign money comes in from outside nations buying goods and services than goes out the other way. 

Instead of allowing oil revenue or foreign reserve surpluses to just sit in a bank account, some countries have created funds to invest the money and create a return. Where the revenue comes from finite natural resources, funds often have express mandates to ensure that when a resource like oil or gas runs out, the country still has a healthy revenue stream.

In that sense, the U.S. already has an internal sovereign wealth fund: The Alaska Permanent Fund invests the oil revenue of the state of Alaska and pays an annual dividend to every adult and child in the state.

Funds like Canada's OMERS or Australia's AustralianSuper are often referred to as sovereign wealth funds and act in similar ways. In fact, they are pension funds or superannuation funds in which a municipality takes a cut of the wages of every worker in the region and invests it on their behalf. 

How do they get involved in real estate? 

Sovereign wealth funds are among the largest individual owners of real estate in the world.

Singapore’s GIC is the second-largest direct owner of real estate globally, with $89B of real estate assets, according to an annual list compiled by PERE magazine, second only to German pension fund Allianz. The China Investment Corporation, Singaporean peer Temasek, The Abu Dhabi Investment Authority, Qatar Investment Authority and Norges Bank Investment Management are all also in the top 25. 

While some have held off investing for the past two years while the real estate market has readjusted, the general trend is for sovereign wealth funds to increase their allocation to the sector, according to fund advisory company Hodes Weill. Many are relatively recent entrants and diversifying their portfolios to invest more in CRE. 

These funds typically have small teams and significant money to spend, tending to do small numbers of very large, eye-catching deals. In 2017, CIC bought European logistics firm Logicor from Blackstone for $13B, one of the largest-ever private real estate deals. Qatar’s wealth fund has bought trophy properties in London, including The Shard. 

How are these funds managed?

Different countries manage their funds in different ways.

In Norway, Norges Bank Investment Management is part of the country’s central bank, with an independent and very public recruitment process for leadership roles. Its annual report provides a high degree of transparency and scrutiny of assets and returns. 

In other countries, levels of transparency over strategy, investments and returns vary, with board or leadership roles often occupied by government officials or individuals with links to ruling royal families or political parties. 

Is the U.S alone in trying to create a new sovereign wealth fund?

Far from it. Ireland, which runs a budget surplus because of corporation tax receipts from global companies that are located in the country, this year set up the Future Ireland Fund, which could have a mandate to invest in real estate. 

And the new Labour government in the UK announced plans to combine various existing government investment vehicles like the British Business Bank and the UK Infrastructure Bank under the banner of a new National Wealth Fund. But given one of the remits of the new fund is to raise outside investment, it is not a sovereign wealth fund in the traditional sense. 

So, is America getting a sovereign wealth fund, and would it invest in real estate?

Details on plans from either the Biden administration or the prospective Trump administration are scant so far. 

“We’ll be able to invest in state-of-the-art manufacturing hubs, advanced defense capabilities, cutting-edge medical research and help save billions of dollars in preventing disease in the first place,” Trump said in a speech to the Economic Club of New York last week.

The first and last of those areas have potential commercial real estate angles. 

Bloomberg reported that the current government’s plans would focus more on emergent technologies like geothermal and nuclear fusion projects, quantum cryptography and shipbuilding. 

The main problem with any proposal for a U.S. sovereign wealth fund is that the government runs a huge budget deficit rather than a surplus. The country’s national debt increases each year — currently $35T and counting.

In addition, the U.S. is a huge producer of natural resources, but those are private rather than government-controlled. There is no excess revenue for a sovereign wealth fund in the traditional sense, though Trump said that increased tariffs on imported goods to the U.S. could be used to provide capital for the fund. 

There is a possibility that existing pots of money could be combined as is being proposed in the UK.