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Once The World’s Biggest Real Estate Investor, ADIA Pivots Strategy To Stay Relevant

Real estate strategy for the Abu Dhabi Investment Authority used to be simple and could be boiled down to one word: diversification. The giant Middle Eastern sovereign wealth fund bought trophy retail and office assets in big global cities and that was enough to turn it into the biggest real estate owner in the world. 

For the past five years or so, however, things have not been so straightforward due to changes in the market and because of unique problems faced by this particular behemoth, namely a steady exodus of top management. 

Now, it has decided to pivot. 

A strategy document quietly published on the opaque fund’s website last month sheds some light on a strategic overhaul. It suggests ADIA is moving away from a strategy of trying to profit from the real estate market through diversification, coming closer in ethos to big private equity funds like Blackstone and Carlyle. According to the document, it plans to pick a few strategies and go big on them. And where ADIA goes, other sovereign wealth funds often follow. 

Abu Dhabi, the home of the world's third-largest sovereign wealth fund.

“In previous cycles, we were successful in building a broadly diversified and well-distributed real estate portfolio, from both a sub-sector and geographical point of view,” ADIA Deputy Director of Real Estate and Infrastructure Salem Al Darmaki said in the strategy paper. 

“Through extensive in-house research and analysis of global trends, we identified up to seven macro thematic strategies, such as the digitalisation of society, for instance, where we see longterm opportunity. These themes will direct our investment activity over the coming years.”

This top-down view is merged with bottom-up, high-conviction investment ideas, Al Darmaki added. That means tapping ADIA’s teams’ geographic and sector expertise as well as relationships with specialist partners to seek very specific pockets of value in market-specific opportunities. 

“This is about aligning our investment activity more directly with our view of the future at a more granular level, while maintaining the flexibility to capitalise on market opportunities,” Al Darmaki said. 

ADIA declined to comment on questions from Bisnow about its revised real estate strategy. 

In the wake of the 2008 financial crisis, ADIA was at the forefront of one of the big recent shifts in how large pension funds and sovereign wealth funds decide to invest in real estate. In the run-up to the crisis, big institutions like these gave a significant portion of their real estate allocations to fund managers to invest on their behalf. 

But those investments often fared poorly in the post-Lehman downturn. Crucially, the institutions didn’t have the ability to guide decisions being made by the managers after handing over the money and ceding control.

ADIA and other funds like it, such as Dutch pension fund APG and Norway’s Norges Bank Investment Management, decided to build in-house teams to invest directly on their own behalf, or in joint ventures with sector specialists. 

For ADIA, this strategy allowed it to allocate a significant part of the income created by its oil reserves and build on what was already a large real estate portfolio. The fund doesn’t publish precise figures, but Global SWF estimated its total asset under management at $849B at the end of 2020, making it the world’s third-largest wealth fund. 

Its real estate holdings are $49B, according to PERE magazine, making it the world’s third-largest real estate owner (as opposed to an investment manager like Blackstone or Brookfield), behind APG and German insurance company Allianz

But that figure saw it fall from the top spot for the first time in recent years. Not being the biggest is not inherently a bad thing, but it does indicate how ADIA has had something of a tough period in the asset class in recent years. 

PERE, in an analysis of ADIA’s real estate strategy, revealed that in the past 18 months ADIA global head of real estate Tom Arnold left the firm, along with Americas head Gerald Fang, European head Pascal Duhamel and acting Asia head Anthony Bertoldi. All of these positions are still open.

The Queensmere shopping centre in Slough, part of ADIA's development scheme

PERE also pointed out that when it comes to direct real estate purchases, ADIA has been a net seller each year since 2015, citing data from Real Capital Analytics, and in 2020 and 2021 ADIA has not made a single direct purchase. 

That doesn’t mean it hasn’t been investing, however, and the investments it has made indicate how it is changing both the strategy of where and how it invests. 

In its strategy paper, ADIA pointed out that direct real estate deals, either solo or in joint ventures, are no longer going to be its primary focus. 

“We are agnostic to the best mode of access for each opportunity,” Al Darmaki said. “We can back one of our convictions by investing in public or private equity or debt — or a combination of all four. We have no pre-allocated budgets for direct, indirect and listed investments, and instead will be led by what makes most sense in each situation, on a global relative value basis.”

As an example, Al Damarki said that when stock markets dropped at the beginning of the pandemic, ADIA saw value in real estate shares and bought heavily. 

“For instance, when public markets dropped sharply at the start of the Covid-19 pandemic, we were able to move at speed and scale into listed opportunities, taking advantage of the dislocation between public and private markets, and executed a number of sizable investments in our areas of focus,” he said. 

Like private equity firms such as Blackstone and Brookfield, Al Damarki said ADIA would be undertaking a smaller number of larger deals, in sectors where it had high conviction.

He did not cite specific sectors, but the fund’s annual review pointed to recent investments in a Chinese logistics platform managed by Prologis and Indian mortgage lender HDFC. PERE said ADIA has invested in Gaw Capital’s Asian data centre business IDC and provided more than $500M to a $3.5B U.S. student accommodation vehicle managed by Athens, Georgia-based student specialist Landmark Properties. Such allocations don’t necessarily show up in the deal numbers, but indicate that ADIA is still putting new money into real estate, just in a different manner than before.

Life sciences and residential were two of the other investment themes mentioned by ADIA in its annual report. In the UK, it is undertaking a mixed-use scheme in Slough, 25 miles to the west of London, that includes building 2,500 homes, 334K SF of retail and 538K SF of offices on a 14-acre site previously taken up by two shopping centres. 

The scheme indicates that, like many investors, ADIA is wary about the future of offices and is far more bullish on residential. A previous pre-pandemic iteration of the scheme called for 1,100 new apartments and between 1.8M and 2.3M SF of offices.

“While it is too early to fully assess the long-term impact of the rapid shifts in consumer behaviour caused by the pandemic, the risk of asset obsolescence has significantly increased for real estate investors," ADIA said in its annual report. "Early signs suggest that accelerated moves to more remote working and online shopping, along with less international travel, represent permanent changes, although by what degree is still hard to determine.”