Prior to the COVID-19 pandemic, sovereign wealth funds showed strong interest in U.S. commercial real estate acquisitions. They took a step back amid the broader uncertainties in 2020. But recent announcements suggest large foreign institutional players may be ramping back up in the U.S., especially in the industrial sector.
In late September, a property developer owned by Singaporean state investment fund Temasek Holdings Pte acquired two portfolios of U.S. logistics properties worth approximately $3 billion; the assets now represent about a quarter of Mapletree Investments Pte’s total assets in the United States.
The two portfolios together include 141 logistics assets with tenants ranging from consumer goods companies to wholesalers and e-commerce operators. The properties sit along key transportation routes with links to airports, highways and sea ports.
In August, Abu Dhabi’s Mubadala Investment Co announced a $1 billion joint real estate venture with Dallas-based Crow Holdings focused on industrial properties. Mubadala holds $243 billion in assets and is seeking to develop class-A U.S. industrial assets “at scale,” according to Crow Holdings CEO Michael Levy.
The two announcements match recent data from New York City-based real estate data firm Real Capital Analytics (RCA), which shows that U.S. industrial investment volume among sovereign wealth funds is growing, even as foreign investors remain cautious in the wake of a pandemic-hit year.
Two of the top five foreign investors in U.S. industrial assets for the period between the second quarter of 2020 and the second quarter of 2021 were sovereign wealth funds, including South Korea’s National Pension Service (NPS), with $1.9 billion in acquisitions, and Singapore’s GIC, with $691 million in buys.
In the first half of this year, industrial acquisitions accounted for 89 percent of purchases by sovereign wealth funds, according to RCA data. Industrial acquisitions by sovereign funds have increased rapidly since 2018, even through the disruption of the pandemic—industrial and office were the only sectors that showed year-over-year growth in acquisitions by this group of investors in 2020.
Overall activity among foreign sovereign wealth funds has continued to lag in 2021, with no single-asset deals. But in the first half of 2021, sovereign funds still acquired 378 percent more industrial assets than their average in the first half of 2017 to 2019. The only other asset classes that saw sovereign wealth fund activity in the first half of the year were hotels and office buildings.
Data from RCA shows Singapore as one of the top five sources of foreign investment in U.S. real estate, alongside South Korea, Germany, Saudi Arabia and Canada. With industrial vacancies near zero and rents at record highs, well-funded foreign investors may be better able to take advantage of large deals coming on the market: from July 2020 to July 2021, industrial deals by foreign investors averaged $27 million in price, compared to an average of $13 million for the asset class overall.
Mapletree’s new US logistics assets are located across Boston, greater Chicago, Dallas, Houston, the Washington D.C. area, the Carolinas, central Florida and Memphis. In general, RCA has seen high demand for industrial properties lead to a shift in preferred acquisition locations. “Like the market overall, investment has shifted away from the major metros towards the non-major metros,” says Alexis Maltin, director of analytics at RCA. “This is partially because of the peaked interest in industrial assets which primarily fall in non-major metros.”
Mapletree’s announcement came just a week after the firm launched its first U.S. office fund, a move that echoes the resilience of demand for office assets among sovereign funds through 2020. It also raises the possibility that sovereign funds will show increased demand for U.S. assets beyond industrial and multifamily. The Mapletree U.S. Income Commercial Trust (MUSIC), launched with $552 million in fully-invested funds, has an initial portfolio that includes five class A commercial properties valued at around $1.3 billion, with leases averaging 8.8 years. Mapletree said the trust has a targeted internal rate of return (IRR) of 12 percent and it will issue distributions semi-annually, with an initial investment term of five years.
It’s still unclear whether Mapletree’s announcements make it an outlier; research by Invesco found that over half of sovereign wealth fund investors were planning to make more acquisitions in 2021 than they did in 2020.
On the whole, in recent years, sovereign funds have been focused on emerging economies, with these markets accounting for 66 percent of the funds’ total collective investments in 2020. But in 2021, this proportion has already dropped to 49 percent, signaling a shift towards established markets like the United States. Between 2017 and 2019, at least five sovereign wealth funds were active in the U.S. market in the first half of the year—of the total assets owned by sovereign funds globally, 89 percent are held by just 20 funds.