If you had all the money in the world, where would you invest it?

For sovereign wealth funds (SWFs), the answer is commercial real estate. These mega funds are homing in on the sector right now, according to emerging markets expert Irwin Greenstein.

We keep hearing about the real-estate meltdown. But as of the end of September, REITs have been up about 2% for the year — a far cry from the wreckage of other markets.

Whether or not the SWFs are quietly propping up commercial REITs may never really be known. But what we do for sure is that these state-owned mega-funds are honing in on commercial real estate.

If you haven’t heard of a SWF, it’s a state-owned investment fund — often with assets in the billions. Many originate in countries with huge surpluses either from trade or commodities, and they have to keep this money in play all the time.

According to a report from AltAssets, SWFs are moving away from mature industrialized markets and into the so-called MENA regions, an acronym for Middle East North Africa.

In fact, with 2008, SWFs have been focused more on MENA than in the previous year.

What does this have to do with commercial real estate?

For SWFs, emerging markets such as MENA and commercial real estate pose less of a risk than the U.S.

In the second quarter of 2008 the SWFs tracked in the study made 43 deals totaling $26.5 billion, compared to 42 deals and $58.3bn during the previous quarter. More than half the deals and funds invested were in emerging markets.

In conjunction with rising interest in emerging markets, SWFs are allocating an increasing amount of money to commercial real estate.

A report issued by the international capital group of Jones Lang LaSalle said that the second-largest sovereign wealth fund, Norway Government Pension Fund, recently allocated 5% of its assets to real estate, infusing another $20 billion of capital into the real estate markets.

The report continues…

“If China follows suit with 5% of their foreign allocation into real estate, we are at nearly $25 billion. If Korea puts a third of their $10 billion allocated to alternative investment in real estate, that brings the total of fresh real estate capital coming to play in the short term up to $28 billion.”

Another report from real estate services giant CB Richard Ellis says SWFs will potentially invest around $725 billion in the next seven years in the global commercial property markets.

The Ellis report says that typical safe havens will include central London, but other trophy real estate targets could be New York, where the Abu Dhabi Investment Council bought the Chrysler Building.

Distressed real estate is ideally suited to the long-term appreciation strategies of SWFs.

With nearly $4 trillion of total assets currently under SWF control, a 7% allocation would mean worldwide commercial real estate investments totaling $280 billion, according to Ellis.

Putting the figures in perspective, Ellis observed that entire U.S. institutional-grade property portfolio owned or managed by investment managers and plan sponsors is valued at approximately $330 billion.

Based on this research, if you’re a headline investor commercial REITs may not be too appealing at this point in time. For contrarian profit seekers, it could be a good move.