Sovereign investors increasingly target real estate for income and liability matching

Real estate offers income generation and access optionality This year, sovereigns cited a range of reasons for increasing target real estate allocations, including the scope to capture liquidity alpha, the potential to generate income matching mid- to long-term liabilities and the potential for internalisation and control. With lower interest rates, lower funding commitments to sovereigns and a lack of appetite to vary asset allocations, the potential for leveraged participation in real estate (equity and debt) appeals to sovereigns seeking alternative means of scaling ‘frozen’ asset allocation to match liabilities. In addition, while there are few alternatives to third-party management and fee structures across infrastructure and private equity (with co-investment in many cases challenged by fund governance and risk appetite), sovereigns have a broad range of options to participate in the development, acquisition and management of real estate. Indeed, there was no consensus among sovereigns on the best placed real estate manager, with internal and external managers, developers and operators cited as preferred real estate partners in figure 16. Sovereigns are also attracted to the flexibility of real estate value chain participation as it reduces upfront funding commitments and allows for a gradual internalisation of expertise and resource. 25 Low fixed income yields means sovereigns are beginning to view property asa reliable source of income. Fig 16. Preferred manager for real estate investments (% citations) Hl Real estate developer i Real estate operator WS Internal investment team li External asset manager Sample is based on sovereign investors and excludes central banks. Sample=28. HOUSE_OVERSIGHT_026705