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Property allocations are concentrated in 'home market' to match liabilities
While real estate allocations account for a small portion of sovereign portfolios, there has been significant relative growth in allocations, particularly in sovereign home markets (figure 17).

Home market real estate is attractive for liability and investment sovereigns, as there is no need to hedge currency exposure, as outlined in theme 2. The increase in home market allocations is mirrored in sovereign appetite for income-generating real estate assets (with yield generation the lead factor for increased allocations shown in figure 18), matching home currency-denominated liabilities at higher yields than domestic fixed income. Consequently, the tilt to real estate in home markets is substantially funded from lower allocations to fixed income (figure 19). Home market allocations also benefited from the trend to internalisation of real asset management. With limited capability to source and manage real estate globally, sovereigns noted that internal investment teams focused more on the local market, particularly in respect of greenfield or residential investments. Domestic real estate investment was greatest among Western and Asian sovereigns (4.9% and 3.1% of assets respectively), due to the depth of high-quality domestic real estate markets. Home markets were viewed as more familiar and accessible; there was a view that proximity facilitated oversight and control, which in turn afforded greater comfort in higher risk categories. Many respondents were also more confident in their ability to pitch for real estate deals locally, given the positive reputation of sovereign investors.

Fig 19. Primary source of funds for new real estate investments (% citations)

Fixed income
48

Equities
23

Liquid alternatives
16

New contributions
13

Sample is based on sovereign investors and excludes central banks.
Sample=31.

27

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