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ALTERNATIVES

Sovereign investors boosting allocations to real estate; Brexit driving funds away

Sovereign investors' real estate allocations continue to increase, said Invesco (IVZ)'s fifth annual Global Sovereign Asset Management Study released Monday.

The study of 97 sovereign wealth funds, national pension funds, central banks and government ministries — representing $12 trillion in assets — found allocations to home market real estate rose to 4.7% of assets in 2017, up from 4.4% in 2016 and 2.8% in 2015, while international real estate allocations rose to 3.4% in 2017 from 2.2% in 2016 and 1.2% in 2015.

Among the reasons for the increase, sovereign investors cited “the scope to capture liquidity alpha, the potential to generate income-matching mid- to long-term liabilities, and the potential for internalization and control,” according to the study.

Invesco's study also found sovereign investors ranked the U.S. as the most attractive market for the third consecutive year, pointing to the increase in interest rates and President Donald Trump's “pro-business” tax regime as positives. In terms of actual allocation, 37% of investors reported overweighting new flows to North America in 2016, the highest reading of any region. A net 40% of investors surveyed said they expect to overweight the region further in 2017.

In Europe, Germany was cited as the most attractive market by sovereign investors, due to its economic strength and status as a “safe haven” for sovereign assets.

On the flip side, the U.K. saw the biggest drop in attractiveness with Brexit, the country's impending exit from the European Union, seen as a negative. Some 41% of sovereign investors said they expect to introduce new underweight positions in 2017; 54% don't intend to make any changes to their allocation weightings; and 5% are planning new overweight positions to the U.K. in 2017.

“2016 was a challenging year for sovereign investors with concerns surrounding funding levels and return expectations remaining front of mind amidst added macroeconomic and political uncertainty,” said Alex Millar, head of Europe, Middle East and Africa sovereigns, Middle East and Africa institutional sales at Invesco, in a news release about the results. “Demand for alternatives like infrastructure has been a consistent theme in past years, but this year the challenge of increasingly scarce supply is compounded. While investors have fewer asset allocation levers with which to respond, they are delving deeper into more supply-rich real estate markets, and looking to the U.S. and Germany for opportunity and economic strength.”

Invesco conducted interviews with 97 sovereign investors in 2017. The report is available on Invesco's website.