Successful purchase of Azerbaijan’s Oil Fund

Analysis Materials 19 December 2012 19:43 (UTC +04:00)
No sooner said than done. That is how you can describe the first deal of the State Oil Fund of Azerbaijan (SOFAZ) on buying property abroad.
Successful purchase of Azerbaijan’s Oil Fund

Azerbaijan, Baku, Dec. 18 / Trend /

Ellada Khankishiyeva, Trend analytical centre head

No sooner said than done. That is how you can describe the first deal of the State Oil Fund of Azerbaijan (SOFAZ) on buying property abroad.

According to a statement released by the fund on Monday, SOFAZ purchased real estate in London in the amount of 177.35 million pounds. This is an office complex in London's West End at St James, 78.

Let me say at once that this property meets the conditions under which the SOFAZ may invest in foreign assets in frames of the investment policy. As it has often been noted by the fund, the liquidity of the acquired property must be high, the price and yield - stable. The basis was set by a long-term lease, the location in downtown, excellent conditions, provision with modern equipment and other conditions.

Thus, the building constructed in 1845, was renovated in 2003 and fully aligned with the office buildings of type "A" with preservation of the historic facade. The total area of the building is 11,018 square meters. The building is leased to HSBC Bank until 2023, with an annual rental oof 9.65 million pounds at 4.5 percent annual return. Currently the building is in use by bank as the headquarters of HSBC in the UK.

2011 Forbes magazine rated HSBC Bank as the largest company in Europe (by market capitalization) and the second in the world. Emplacement of the world's largest financial conglomerate in the building acquired by SOFAZ adds competence to the purchase.

The seller was no less competent RREEF Real Estate company engaged in property investment in the sector of management of Deutsche Bank funds. Legal adviser Clifford Chance and broker Jones Lang LaSalle selected by SOFAZ also inspire confidence. According to the ratings of international law firms the British Clifford Chance has the third highest income (2340.5 million dollars), and is second in the world for number of lawyers (2837). With regard to the latter, this company is one of the market leaders in the field of management of corporate real estate and has a portfolio of 130 square meters around the world.

This purchase can also be called successful considering the fact that according to a recent study by the oldest real estate company in the world market, British Savills, property prices in London will rise by more than 25 percent in the next five years. The largest price increase (25.6 percent) will be observed in the prestigious central regions of London, such as Westminster, Kensington and Chelsea, largely thanks to interest from buyers from abroad. It is expected that the cost of renting in London will also grow by 26.4 percent in the next five years. London will be far ahead of other regions in regards to increases in property prices. In general, the cost of property in the UK will increase by about 14.7 per cent.

Thus, taking the first successful step in the purchase of real estate in Europe, the State Oil Fund will continue real estate investment in other countries. Russia and Turkey may become the next countries for investment, because of their large capital markets and developed trade and economic relations with Azerbaijan. SOFAZ has already purchased currency from these countries. The fund is also considering property investments in Paris and Rome, as well as in Singapore, Malaysia and Indonesia. The global economic crisis has significantly 'discounted' real estate in New York, making it attractive for purchase.

The main criterion for SOFAZ in making investments of this type is obtaining a high and stable income in the coming years. It should be noted that during the 12 years of the fund's activity, SOFAZ's profitability level never exceeded 4%. Moreover, a decline in this level was observed after 2009. This is because at the time of establishment of the fund, 90% of its investment portfolio was in bonds. Growth was also stunted by the fact that the corporate securities that made up the majority of the portfolio were not equal to state bonds from leading countries in terms of reliability; also their profitability is inferior to real estate investments. According to the Oil Fund report, the profitability of real estate in London is 4.5% per annum.

Since SOFAZ increased its assets more than 120 times in its beginning years, the further diversification of its investment portfolio will likely lead to the multi-fold increase of this figure. This year, the maximum amount of the portfolio was determined in stocks for the first time, while real estate and gold will be the future direction of the fund's investments.