There is a new player in the United Kingdom real estate industry – the Sovereign Wealth Fund. But what is it? There is no formal definition of what a SWF actually is, but the nearest we have is that many countries – often those benefiting from windfalls from gas, minerals or oil – have extensive funds that are usually state-owned and invested in industries throughout the world.
The Middle East in particular has SWFs, which now may become more dominant worldwide as they remain strong at just the time that other global regions have become much weaker and need investment from outside.
With almost all purely private sources of investment subject to
some constraint at the moment (private investors lack confidence or simply cannot borrow) the concept of the "state-backed" SWF has come into its own.
The growing importance of SWFs in the UK property industry has two manifestations. Firstly there is the indirect involvement. A number of finance institutions have turned to SWFs for capital to avoid drawing on the various bailout schemes created by the UK Treasury. Barclays, for example, late last year accepted £7.3 billion (Dh39.83bn) from Abu Dhabi and Qatar. In turn, some of this money is being used now for property industry investment, although presumably with no reference back to the original fund-holders.
Secondly there is the more direct involvement. In recent weeks the former United States embassy building in a prime historic square in central London has been purchased by two UK commercial real estate entrepreneurs, both using funds from Middle Eastern SWFs. There are many similar projects throughout London, with the most famous being the Qatari SWF that helps the Candy Brothers buy the Chelsea Barracks development site as well as part-funding the brothers' legendary (and still unfinished) One Hyde Park residential scheme.
But this is not just about today. SWFs will play a big part in the future, too.
UK-based residential developers may soon re-enter the market to resume building as prices hit the floor and begin to rise in the second half of 2009 or 2010. But, according to research guru Liam Bailey of Knight Frank, "by the time recovery comes traditional house builders may not necessarily own the land with planning permission – we believe a large portion will be in the hands of Sovereign Wealth Funds".
In the UK there are concerns that some other countries, through their SWFs, may be "exploiting" west European and north American economic weaknesses and may become too influential in some national economies. Such concerns provided a sub-text for the recent financiers' debates at Davos; a few leading property individuals have argued against the funds, too.
But isn't such an oppositional stance just another example of short-sighted protectionism?
Bader Al Sa'ad, Managing Director of the Kuwait Investment Authority – effectively an SWF – says such funds were not new, nor are they as suspect as some believe. "Our fund started in 1953," he says. "Kuwait has been a Daimler shareholder since 1969… a BP shareholder since 1986, we are one of the most stable shareholders of these companies."
Whether we like it or not, SWFs are an inevitable part of globalisation, a process that has been inherent in capitalism and the real estate industry in recent decades.
At the most basic level, an estimated 800,000 UK citizens own homes overseas; for half a century, many foreign investors have bought residential property in London, a trend that is likely to accelerate in the next two years as global bargain hunters see that the UK capital offers exceptional value during a downturn.
So shouldn't the real estate industry simply stop complaining about SWFs and accept the world has moved on from "UK investors in UK buildings"? Yes, it should.
The reason is simple. Over the past year the banking system in the West has been exposed as being built on the mistaken (some would say knowingly exaggerated) valuations of assets. On top of that, the banks and similar institutions engaged in what we now know to have been uncontrolled sub-prime lending.
The result is that the traditional sources of funding for major property projects have largely dried up while the mess is sorted. That looks likely to take another year, possibly two.
So as a result SWFs are moving in, taking up the slack. Like any good investor, they are taking advantage of current low prices. But in doing so, the funds help keep some schemes on track and play a major part in the West's real estate recovery.
They should be welcomed. Jingoistic rhetoric and small-minded thinking are just what we do not need right now.
- Graham Norwood is property correspondent for The Observer