How to create a British Sovereign Wealth Fund

Brian Sturgess, Keith Boyfield - November 2013

Speed Read
  • Britain does not possess a Sovereign Wealth Fund in contrast to Norway whose Government Pension Fund has assets of US$804 billion.
  • There are proposals to use The Crown Estate, one of Britain’s largest property owners, as the core of a British Sovereign Wealth Fund.
  • The Crown Estate’s position is coming under review with privatisation as another option which would raise significantly greater sums than the recent sale of the Royal Mail
  • Whatever the fate of The Crown Estate it should be permitted to borrow and invest overseas particularly in the Commonwealth.

Just before the Coalition government in Britain part privatised the Royal Mail – incurring criticism for underselling the real value of the assets – a group of Labour MPs affiliated to the troubled Co-op group published a paper calling for the creation of a sovereign wealth fund (SWF) using The Crown Estate as a base. This was a highly significant move since it signalled the beginning of what is likely to become a wide ranging debate on the future of one of Britain’s largest property investment and management businesses. Furthermore, there are 73 SWFs ranging from the world’s smallest the Ghana Petroleum Fund with assets of only US$70 million to the largest the Norway (Government Pension Fund Global) with assets of $803.9 billion. Britain, stands out as an oil and gas producer which has no SWF. 

The Position of The Crown Estate
The Crown Estate was created in 1760 by Parliament as a means of funding the monarchy. In return for an annual Civil List payment, the monarch transferred all revenues generated from the Crown Estates to Parliament – but only for the duration of their reign. The legislature must pass a new Civil List Act each time a new monarch succeeds to the throne. When the current Queen dies this statutory requirement is likely to trigger a wide ranging debate about the type of monarchy Britain wants. 

But in the meantime, The Crown Estate pays a surplus - effectively a dividend - to the Exchequer. This year it paid over £253 million, a sizeable sum but not a massive return on net assets valued at £8.6 billion. It should be stressed that neither the Monarch nor the Government can tap the considerable capital now accumulated within what is effectively an (inaccessible) trust.

With Britain’s Chancellor of the Exchequer looking round for new options to service the country’s national debt and help balance the books the Co-op group of MPs proposal to move to establish a new sovereign wealth fund (SWF) takes forward an emerging debate about the whole future of The Crown Estate. This asset rich entity is attracting increasing attention from leading think tanks, such as the Adam Smith Institute and Centre for Policy Studies. Both have suggested that The Crown Estate should be privatised. Given that the latest report and accounts value its net asset base at £8.6 bn any such sale could prove a far more substantial contribution to the Exchequer than the partial sale of the Royal Mail, which raised £3.3 bn, albeit the share price surged to 502.5p against an offer price of 330p within the first few days of trading on the stock market. 

The Crown Estate manages a broad spectrum of assets ranging from a rental stream charged (literally) on offshore assets, notably a growing gaggle of renewable wind farms, to a portfolio of rural farmland assets valued at approximately £1.2 billion. However its principal core assets is a large swathe of prime commercial and retail real estate in the West End of London, centred on Regent’s Street and Piccadilly worth billions. In addition, The Crown Estate has acquired 16 retail parks, one leisure scheme, and interests in three shopping centres across Britain to add to its nationwide portfolio of commercial and retail assets.

The management team has built up a reputation as an efficient manager of these widely diverse property assets. In the last few years they have won a clutch of awards including 'Deal of the Year' from Property Week magazine, and 'Best Institutional Investor in UK & Ireland' in the 2012 IP Real Estate Awards.

Reflecting the prime quality of its property base, centred on its West End holdings, The Crown Estate enjoys a very low void rate. With foreign investors piling into property assets in London, The Crown Estate could generate considerable interest if all or even part of it was offered for sale as a Real Estate Investment Trust (REIT). Recently for example, St Martins, the property arm of the Kuwaiti government, has invested in the Willis Building in the City, the Hays Galleria retail complex near London Bridge and City Hall, the Mayor’s headquarters. Meanwhile, the Hong Kong Monetary Authority has set up a joint venture with Great Portand Estates, a REIT, to invest in properties surrounding the new Crossrail station at Oxford Circus. Out of £4.7 bn of deals completed in the third quarter of 2013 in the London commercial property market , 22% were made by Asian investors.

The Coalition government is currently reviewing the national asset register for candidates to privatise such as Urenco the uranium enrichment company; government held shares in Lloyds Bank; and a stack of student loan funds (on this final option the government recently appointed two investment banks to advise on a potential sale).

Some observers may question how easy it would be to privatise or restructure The Crown Estate given its somewhat curious status: it is neither a state owned enterprise nor a Non Departmental Body. Yet there are precedents, a recent example being the Tote. 

The nation’s ‘bookmaker’ was nationalised by the last Labour government as a preparatory move towards privatisation. The eventual sale in July 2011 was completed by the Coalition government following a competitive bid process. Under the terms of its sale to Betfred the Tote will continue to enjoy a monopoly (first conferred in 1928 under the terms of the Racecourse Betting Act) of totaliser or pool betting until 2018. This officially conferred competitive advantage enabled the government to raise £265 million, which has some gone some way towards funding public expenditure and servicing the national debt.

Liberating The Crown Estate
The Crown Estate is currently barred by statute from either borrowing money in its own right (which makes little commercial sense given the very low void rates on its property portfolio – it would have no problem servicing debt on modest borrowings), nor is it allowed to invest overseas. Consequently, all its investment risk is concentrated in one jurisdiction – the UK. Significantly, other private estates such as Buccleuch and Grosvenor (the former is the Duke of Buccleuch’s family group, the latter the Duke of Westminster’s) have opted to diversity their risk by investing extensively overseas, not least to guard against any move to purchase - on a compulsory basis - some or all of their assets in the UK at a knock-down price. 

If a future Labour government was to transform The Crown Estate into a SWF it might wish to allow it to focus its overseas investment strategy on the Commonwealth, an institution cherished by the Royal Family, particularly the Queen. The Commonwealth includes some of the fastest growing economies in the world, such as Malaysia, Nigeria and India, so from an investment point of view such a strategy has considerable attractions.

As Gareth Thomas, chair of the Co-op party's group of 33 Labour MPs, points out: "A British sovereign wealth fund could promote co-operation with fast-growing overseas businesses, earning the UK vital income over the long term”.

As our table shows, the world’s largest SWFs have built up significant asset bases. Norway tops the league with a SWF valued at $804 bn while the Abu Dhabi Investment Authority has built up assets of $627 bn and and Qatar $115 bn. Significantly, these SWFs are major investors in the London property market. Indeed, Singapore’s Tamasek Holdings with assets of $173 bn recently announced that it was opening a London office, headed up by former UBS banker Jon Cryan, to assess opportunities in the UK, Europe as well as, notably, rapidly developing economies in Africa.

Given this global trend towards the creation and development of SWFs The Crown Estate may yet emerge as the core of Britain’s own SWF. It may indeed be named after the current monarch, Elizabeth II, to demonstrate in tangible form her lasting legacy across the Commonwealth.