As sovereign wealth funds look beyond bonds and equities, another great rotation is underway

Now there’s a great rotation.
Now there’s a great rotation.
Image: AP Photo/Michael Dwyer
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Azerbaijan is planning to take some of its $34 billion in state oil wealth on a trip Down Under, where it will shop for real estate (paywall), as the sovereign wealth fund told the Wall Street Journal.

That makes the Azeri fund the latest sovereign wealth fund to board the property investment bandwagon. Norges Bank Investment Management—the world’s biggest sovereign wealth fund, which manages Norway’s pension fund—got this bandwagon rolling last year, when it announced that it was carving out room in its traditionally bond- and equities-heavy portfolio to make room for a 5% allocation toward real estate investments. The $703-billion fund has since snapped up properties—most of them office complexes and malls—in London, Paris, Frankfurt, Berlin, Zurich and Sheffield.

But it’s not the only fund on a real-estate rampage. The $247.5-billion Government of Singapore Investment Corp sank $851 million into a posh San Francisco office building last October. And in total, the $10 billion that sovereign wealth funds invested in property last year made up an unprecedented 21% of their aggregate investments, according to the Sovereign Investment Lab at Bocconi University. (The next-highest on record was 2011’s 16%.)

As the Azerbaijan fund indicated, that trend looks set to continue in 2013. Norway’s fund just yesterday agreed to pay $600 million for stakes in properties in New York, Washington and Boston. Others, including the New York Common Retirement Fund and Finland’s Keva, may soon follow suit.

Driving this trend is the scarcity of high-yield investment opportunities, as Andrew Rozanov, head of sovereign advisory at London-based Permal Investment Management Services Ltd, told Bloomberg. “Given the very low yields in the bond markets and the volatility in the equity markets, real estate is an attractive play at the moment, especially for long-term investors,” said Rozanov. Perhaps that makes it the real “great rotation.”