Sovereign Wealth Funds (SWFs) are an institutional investor class about which relatively little is known. Even though they have trillions of dollars in assets under management, their (typically) highly secretive nature renders them difficult to analyze in an academic context. We utilize transactional data from the Sovereign Wealth Fund Institute to provide the first academic analysis of SWF real estate investment activity of which we are aware. To better understand this growing investor class, we compare SWFs with their most closely related institutional group, public pension funds (PPFs). While both SWFs and PPFs are state owned investment funds, we find SWFs have lower Stone and Truman (2016) best practice scores (based on fund structure, governance, transparency and accountability, and behavior.) Further, while both SWFs and PPFs show increasing levels of cross-border real estate investment, SWFs are significantly more likely than PPFs to invest across international borders. We find the percentage of SWF cross-border real estate investment to be substantially higher than the percentage of SWF cross-border investment in public and private equity documented in other studies. Moreover, in a subsample of acquisitions in the U.S., cross-border real estate investments are in locations with lower capitalization rates than domestic acquisitions for both SWFs and PPFs, and there is no discernable difference in rates across the two fund types, on average.
This is a preview of subscription content, access via your institution.
Buy single article
Instant access to the full article PDF.
Tax calculation will be finalised during checkout.
Subscribe to journal
Immediate online access to all issues from 2019. Subscription will auto renew annually.
Tax calculation will be finalised during checkout.
https://www.swfinstitute.org/sovereign-wealth-fund-rankings/ (Accessed 10/12/2017).
By comparison, the total assets under management for all hedge funds and private equity funds during the same time are estimated to be $3 trillion and $2.5 trillion, respectively.
https://www.ft.com/content/22f693a0-2960-11e6-8b18-91555f2f4fde (Accessed 10/13/2017).
https://www.wsj.com/articles/SB121561441265439259 (Accessed 10/13/2017).
https://nyti.ms/2u3TJdT (Accessed 7/12/2017).
The use of Stone and Truman (2016) scores, and an earlier version by Truman (2008), is well established in the SWF literature. For example, Dewenter et al. (2010) and Kotter and Lel (2011) incorporate the scores to capture the cross section of best practices by sovereign wealth funds. As Stone and Truman (2016) show, fund scores can be loosely interpreted as a type of fund governance quality ranking and have improved over time as funds have voluntarily chosen to more closely follow the generally accepted principles and practices laid out by an international working group of SWFs over the course of three meetings held in Washington, D.C., Singapore, and Santiago, Chile. See IWG (2008) for the original “Santiago Principles.”
See Alhashel (2015) for a review of the literature that supports the idea that SWFs are economic agents that act in a similar manner to other institutional investors.
CoStar and Real Capital Analytics have some transactional information on U.S. properties with foreign wealth fund investment. However, we find the SWFI database to be the best in terms of coverage for the present study. Moreover, this exercise is limited to transactional data as portfolio holdings data are not currently available.
Honk Kong is considered separate from China for purposes of this study.
The calculation of the coverage of the sample is limited by the fact that we do not account for price changes of assets held nor do we adjust for asset sales and instead simply report the value of transactions observed.
Some SWFs are restricted from investing domestically. However, in unreported results we find our inferences remain unchanged when they are excluded.
While this specification can be interpreted as the likelihood of being a SWF, we find it to be a useful means of establishing whether there are observed differences between SWFs and PPFs.
Alhashel, B. (2015). Sovereign wealth funds: A literature review. Journal of Economics and Business, 78, 1–13.
Andonov, A., Kok, N., & Eichholtz, P. (2013). A global perspective on pension fund investments in real estate. Journal of Portfolio Management, 39, 32–42.
Andonov, A., Kok, N., & Eichholtz, P. (2015). Intermediated investment management in private markets: Evidence from pension fund investments in real estate. Journal of Financial Markets, 22, 73–103.
Andonov, A., Bauer, R. M. M. J., & Cremers, K. J. M. (2017). Pension fund asset allocation and liability discount rates. Review of Financial Studies, 30(8), 2555–2595.
Bernstein, S., Lerner, J., & Schoar, A. (2013). The investment strategies of sovereign wealth funds. Journal of Economic Perspectives, 27(2), 219–238.
Blundell-Wignall, A., Hu, Y. W., & Yermo, J. (2008). Sovereign wealth and pension fund issues. Financial Market Trends – OECD Journal, 2008, 117–132.
Bortolotti, B., Fotak, V., & Megginson, W. L. (2015). The sovereign wealth fund discount: Evidence from public equity investments. Review of Financial Studies, 28(11), 2993–3035.
Boubakri, N., Cosset, J. C., & Grira, J. (2016). Sovereign wealth funds targets selection: A comparison with pension funds. Journal of International Financial Markets, Institutions, and Money, 42, 60–76.
Bradley, D., Pantzalis, C., & Yuan, X. (2016). The influence of political bias in state pension funds. Journal of Financial Economics, 119, 69–91.
Calluzo, P., Dong, G. N., & Godsell, D. (2017). Sovereign wealth fund investments and the US political process. Journal of International Business Studies, 48, 222–243.
Costello, J. (2016). Cross-border investment in US commercial real estate. NAIOP Development Magazine. http://www.naiop.org/en/Magazine/2016/Spring-2016/Finance/Cross-border-Investment-in-US-Commercial%2D%2DReal-Estate.aspx
Dewenter, K. L., Han, X., & Malatesta, P. H. (2010). Firm values and sovereign wealth fund investments. Journal of Financial Economics, 98, 256–278.
Dyck, I. J. A., & Morse, A. (2011). Sovereign wealth fund portfolios. Working paper. University of California, Berkeley and University of Toronto.
Fama, E., & French, K. (1997). Industry costs of equity. Journal of Financial Economics, 43, 153–194.
Freybote, J., & Seagraves, P. A. (2017). Heterogeneous investor sentiment and institutional real estate investments. Real Estate Economics, 45(1), 154–176.
IWG (International Working Group of Sovereign Wealth Funds). (2008). Sovereign wealth funds generally accepted principles and practices, Santiago principles.
Johan, S., Knill, A., & Mauck, N. (2013). Determinants of sovereign wealth fund investments in private equity vs public equity. Journal of International Business Studies, 442, 155–172.
Karolyi, G. A., & Liao, R. (2017). State capitalism’s global reach: Evidence from foreign acquisitions by state-owned companies. Journal of Corporate Finance, 42, 367–391.
Knill, A., Lee, B. S., & Mauck, N. (2012). Bilateral political relations and sovereign wealth fund investment. Journal of Corporate Finance, 18, 108–123.
Kotter, J., & Lel, U. (2011). Friends or foes? Target selection decisions of sovereign wealth funds and their consequences. Journal of Financial Economics, 101, 360–381.
Lieser, K., & Groh, A. P. (2014). The determinants of international commercial real estate investment. Journal of Real Estate Finance and Economics, 48, 611–659.
Malpezzi, S., & Shilling, J. D. (2000). Institutional investors tilt their real estate holdings toward quality, too. Journal of Real Estate Finance and Economics, 21(2), 113–140.
Mauck, N., & Price, S. M. (2017). Determinants of foreign versus domestic real estate investment: Property level evidence from listed real estate investment firms. Journal of Real Estate Finance and Economics, 54(1), 17–57.
Mauck, N., & Price, S. M. (2018). Governance and international investment: Evidence from real estate holdings. Journal of Real Estate Research, 40(4), 475–521.
Megginson, W. L., & Fotak, V. (2015). Rise of the fiduciary state: A survey of sovereign wealth fund research. Journal of Economic Surveys, 29(4), 733–778.
Miracky, W. F., & Bortolotti, B. (Eds.). (2009). Weathering the storm: Sovereign wealth funds in the global economic crisis of 2008. Boston: Monitor Group and Milan, Italy: Fondazione Eni Enrico Mattei.
Stone, S. E., & Truman, E. M. (2016). Uneven progress on sovereign wealth fund transparency and accountability. Peterson Institute for International Economics.
This paper has benefited from the helpful comments and suggestions of two anonymous reviewers, Maarten van der Spek (Abu Dhabi Investment Authority) and seminar participants at University College London, San Diego State University, the 2018 ARES Conference, and the 2018 AREUEA National Conference. We also thank Xin Fang for research assistance. A portion of this study was completed while McKay Price was a visiting scholar at the University of Cambridge. All remaining errors are our own.
Springer Nature remains neutral with regard to jurisdictional claims in published maps and institutional affiliations.
Appendix 2 SWF/PPF Classification
The acquirer in every transaction was reviewed and the classification by SWFI was double-checked in all cases. Some PPFs are, in essence, wholly owned government subsidiaries. These are considered to be government owned as they are still subject to the same pressures and influences. We follow the literature (Miracky and Bortolotti 2009; Bortolotti et al. 2015) and rely on the Sovereign Investment Lab (SIL) definitions, in all cases, in classifying buyers as either SWFs or PPFs. Collectively, we altered SWFI classifications for 12 funds consisting of 115 observations. In particular, we made the following changes to SWFI classifications:
Queensland Investment Corporation was changed from Superannuation to PPF (4 observations).
Korea Post was changed from Public Fund to PPF (9 observations).
UniSuper was change from Superannuation to PPF (1 observation).
Permanent Wyoming Mineral Trust Fund was changed from SWF to PPF (1 observation).
Texas Permanent School Fund was changed from SWF to PPF (7 observations).
New Mexico State Investment Council was changed from SWF to PPF (5 observations).
Hong Kong Monetary Authority was changed from SWF to PPF (5 observations).
Canada Plan Investment Board was changed from SWF to PPF (1 observation).
CalPERS was changed from SWF to PPF (1 observation).
AustralianSuper was changed from Superannuation to PPF (6 observations).
Alaska Permanent Fund was changed from SWF to PPF (73 observations).
Alberta Investment Management Corporation was changed from SWF to PPF (2 observations).
About this article
Cite this article
Liu, P., Mauck, N. & Price, S.M. Are Government Owned Investment Funds Created Equal? Evidence from Sovereign Wealth Fund Real Estate Acquisitions. J Real Estate Finan Econ 61, 698–729 (2020). https://doi.org/10.1007/s11146-019-09730-y
- Sovereign wealth funds
- Real estate investment
- International real estate
- Foreign investment
- Cross-border investment
- Public pension funds