Sovereign investors, like many, see low interest rates as the greatest tactical asset allocation factor. Low rates drive allocations to real estate, as sovereign investors seek alternative sources of income generation, finds a report on sovereign asset management by Invesco, which surveyed sovereign (government) wealth funds, state pension funds and central banks.

Read: Is housing exposure a risk for portfolios?

In search of returns

Returns are challenging for sovereigns who have, on average, underperformed their target returns by 2%, says the report. Over the past three years, governments have responded to poor economic performance by reducing new funding (on average, down to 5% in 2017, from 8% in 2015) and cancelling investments (down to -3% in 2017 from -1% in 2015).

“Demand for alternatives like infrastructure has been a consistent theme in past years, but this year the challenge of increasingly scarce supply is compounded, ” Alex Millar, head of EMEA sovereigns and Middle East and Africa, institutional sales, at Invesco, says in a statement. “Investors have fewer asset allocation levers with which to respond. They are delving deeper into more supply-rich real estate markets and looking to the U.S. and Germany for opportunity and economic strength.”

Some of the report’s key takeaways:

  • U.S. is number one

As they have for the past three years, sovereigns rank the U.S. as the number-one market for attractiveness. For instance, 37% of respondents report overweight new flows to North America in 2016 relative to their total portfolios – higher than any other region. And a net 40% are planning to overweight further in 2017.

The reason: interest rate increases and confidence in potential pro-business policies. But growing protectionism concerns could hurt confidence in the longer term.

  • U.K. falls in attractiveness

The U.K. saw the biggest drop in attractiveness to sovereigns, with 33% of respondents saying they’re underweight new flows to the U.K. (higher than any other region) compared with 13% who report new overweight positions to the U.K.. The rest (54%) cite no change.

Brexit is seen as a significant negative for investing in the U.K., and sovereign investors with European interests question the future of the U.K. as an investment hub for Europe, given uncertainty over taxes on imports and market access.

However, when the fall of the pound is taken into account, U.K. allocations remain relatively stable, with stated allocation declines of -15% likely linked to the corresponding drop by 16% in the value of the pound relative to the U.S. dollar, rather than withdrawals. Further, the fall in the pound’s value has led to a rally in U.K. stocks.

  • Germany gains ground

Germany stands out from its European neighbours as one of the most attractive investment destinations globally for sovereigns. Its popularity is attributed to its perceived safe haven status and economic strength.

Read: Best and worst investments across the globe

Read the full report.

About the study: In 2017, Invesco conducted interviews with 97 sovereign investors, compared with 77 in 2016. Invesco defines sovereign investors as state-owned investors, which includes stand-alone sovereign wealth funds, state pension funds, central banks and government ministries.

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