Wealth funds join charge into property assets Yields on high-quality buildings in London and other prime markets have held steady at 4-6% In the last days of 2012, executives from Norway's oil-rich government fund gathered in their Oslo headquarters to thrash out the details of a €2.4bn deal that would a year earlier have been an unlikely call for even the most sagacious property market observer. The world's largest sovereign wealth fund was about to sanction its most lavish spending spree on property - buying warehouses. The joint venture with Prologis, the industrial property landlord, was for Norges Bank Investment Management the latest in a series of increasingly ambitious bets on the global real estate market. The investment helped ensure the $720bn fund increased by 10 times its annual spending on property. Far from being an outlier, though, NBIM is part of a wide-reaching shift in property ownership. Sovereign wealth funds have joined a global hunt by long-term, cash-rich institutional investors, including most of the world's largest pension and insurance funds, to secure exposure to the property market. Hans Vrensen, global head of research at DTZ, a property consultancy, says investors with the ability to enter the real estate market are increasingly eager to do so. The yields in the bond market are just not there at the moment; stocks, meanwhile, are volatile. With real estate, you have the attraction of total return [rental income and capital appreciation] and the protection of owning hard assets, which you know are not just going to get wiped out over night. Since recovering from its nadir in 2009, yields on high-quality buildings in London, Paris, New York and Hong Kong - the so-called prime markets - have held steady at between 4 and 6 per cent. Yields on 10-year UK gilts, US Treasuries and German Bunds, meanwhile, are at below 2 per cent. Peter Damesick, chairman of CBRE research in Europe, says this spread is "the single biggest pull for money coming into property at the moment." The case is one increasingly made by fund managers for stepping up their allocation to real estate. The solution to the debt crisis is to raise asset values, so it makes absolute sense to own something that stands to benefit from that and also produces income in its own right Trevor Greetham, Fidelity Worldwide Trevor Greetham, an asset allocation director at Fidelity Worldwide, says his fund has, with the exception of a few months, been overweight on property investments since May 2009. The fund is among the largest shareholders in a cluster of real estate investment trusts, a tax-efficient model that requires property companies to return 90 per cent of income to investors. He adds, though, that the better yields on offer are only one side of the equation. The solution to the debt crisis is - explicitly in the case of quantitative easing in the US - to raise asset values, so it makes absolute sense to own something that stands to benefit from that and also produces income in its own right. Another draw for institutional investors is the recent return of liquidity in the world's big office and retail property markets. The $160bn invested into property during the final three months of 2012 was, according to data from Real Capital Analytics, the highest quarterly spend for five years. In spite of the bounce back, much of the investment is focused on a handful of perceived haven markets, the foremost of which is London. The UK capital has taken an increasing share of global property investment, with a host of Southeast Asian governments lining up to compete with Canadian pension funds and European private equity investors to own London buildings. The extent of the city's dominance is underlined by data from CBRE showing that the value of transactions in London account for more than the total for any other European country. However, some property industry experts are warning that the demand could be reaching its climax. The fear is that the appetite for high-quality property is underpinned by a surge of ultra-long-term capital that will, once invested, prove deleterious to trading volumes. If there is a negative, it is that there is a shrinking pool of assets as many are being locked away. The upshot is that turnover of stock falls off and the market becomes opaque and setting realistic prices gets much harder," says one estate agent. The competition for the best assets is starting to compress yields and drive some investors to seek out esoteric property investments. US student housing, Dutch police stations, speculative residential developments in Germany and Brazilian shopping malls have been included in the wide sweep of so-called alternative property assets to be traded heavily this year. The charge into these investments has been led by private equity firms such as Blackstone, one of the most active real estate investors globally with a $13.3bn fund. Ken Caplan, Blackstone's head of real estate in Europe, says opportunistic investors are enjoying a purple patch created by an unusual confluence of market forces. Banks on both sides of the Atlantic, many of them under the auspices of the state, are eager to sell the often troubled property they amassed in the wake of the financial crisis. At the same time, demand for stable property is soaring. The core buyers are focused on low-risk, bond-like yielding property, meaning opportunistic investors like us are investing in situations where there are problems, such as the capital structure or the management of a building, fixing problems and ultimately selling [to those same investors]. But while these alternative investments were once the preserve of only the most risk-tolerant buyers, the fight for established income-producing property is pushing more conservative investors - such as the Norwegian government - to look further afield.