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Spotlight Article

Azerbaijan to Buy Australian Real Estate

February 13, 2013

SYDNEY—Azerbaijan's $34 billion sovereign-wealth fund plans to buy commercial real estate in Australia as part of a strategy to add assets down under.

"We plan to travel to Australia in order to meet with the leading market participants including regulators, developers, asset owners, and overseas investors to gain deeper understanding of the market," said the State Oil Fund of the Republic of Azerbaijan, or Sofaz, in an email response to questions. "This trip is planned to take place during the course of this year."

The former Soviet republic, known for caviar and oil, is among a growing number of foreign investors seeking out higher returns from commercial real estate in Australia. The sector has outperformed those of most other advanced economies since the depth of the financial crisis in 2008, beaten only by Hong Kong, Singapore and Canada, research by Australia & New Zealand Banking Group Ltd. ANZ.AU +0.91%shows. Foreign investment in the last financial year into Australian commercial property—such as hotels, offices and malls—came to 39.4 billion Australian dollars (US$40.7 billion), nearly twice the year-earlier A$20.6 billion.

"Australia, in our mind, offers the best of the two worlds," said the fund. "Growth dynamics of the Asian countries coupled with strong landlord rights, long tenancy agreements and market transparency of the Western world."

Azerbaijan's interest in Australia comes as a number of high-profile commercial real-estate projects reach a critical period of final approvals and capital raising. The most significant under way is the A$6 billion development of a large derelict area of Sydney's inner harbor. The planned casino, hotel and commercial complex, known as Barangaroo, is backed by Australian gaming billionaire James Packer.

Sofaz, which Azerbaijan established in 1999 to capture oil and gas revenue, said it's ramping up its investments in Australia after last year buying its first Australian government debt and first shares in "major" Australian companies—big enough to appear in the MSCI World Index. The fund has already allocated around A$200 million for shorter-dated Australian government notes and bonds. Its overall mandate allows up to 5% of its investment portfolio to be held in countries with a credit rating of single-A or higher.

Australia's stock market has surged this year, and Wednesday the benchmark S&P/ASX 200 index broke through the 5000 barrier to close at its highest level since September of 2008. This year's ascent, driven by easing global worries and growing optimism about Australian corporate profits, follows a 15% rise in 2012.

But investment in Australia isn't without risk for the Azeri fund. Any commercial real estate backed by foreign wealth funds has to be to the Foreign Investment Review Board, a government watchdog. And foreign investment is likely to be an increasingly contentious subject ahead of a general election planned for September. Opposition lawmakers led by Tony Abbott want tighter scrutiny, especially over the purchase of agricultural land, and forced the government to agree to introduce a public register of overseas holders of government bonds. The Labor-led government of Prime Minister Julia Gillard, behind in opinion polls, has made increasing the flow of investment from Asia a key part of its economic policy.

Tensions over the issue came to head last year following the purchase of a giant cotton farm called Cubbie Station by a Chinese-led consortium. So far, the political concerns have focused on Chinese investment in agricultural land.

Sofaz's move into commercial real estate isn't exclusive to Australia. The fund said it has started buying property in major cities such as Paris, London and Moscow, and eventually wants to allocate 5% of its assets to real estate.

"In order to build up a high-quality real-estate portfolio, Sofaz will continue to invest across major countries and will imminently consider opportunities in the Australian commercial property market," said the fund.

Yields on commercial property in Australia are around 7%, compared with less than 5% in the rest of the world, said Andrew Salter, a strategist at Australia & New Zealand Banking. "Australian capital cities are much more attractive than comparable investments in other major global cities," said Mr. Salter.

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