Over the past decade, Norges Bank has been one of the biggest players in global property investment. So why has Norway’s sovereign wealth fund now decided to reposition its activities and reduce its allocation to the asset class?
Norges Bank has been part of the global real estate scene for the best part of a decade in a comprehensive asset grab which began with a bang in London.
It initially sought a mandate to begin investing in property in 2008 but didn’t strike a deal until 2010, when it bought a 25% stake in London retail mecca Regent Street from the Crown Estate for £750m.
Since then, the 8.6tn Norwegian kroner (£770bn) oil fund has become a formidable force in property investing, spending an estimated $25bn (£19bn) on real estate across three continents.
Its announcement in February that it would be repositioning its 130-person property team, Norges Bank Real Estate Management, and would now have a greater focus on listed real estate, was therefore met with some interest. Norges also said it would be reducing its allocation to the asset class from 7% to 3-5%.
Karsten Kallevig, previously the chief executive of the Real Estate Management division, was appointed CIO for real estate at Norges Bank Investment Management on 1 April – a new role, both for him and the company, reflecting the real estate division’s integration into NBIM and the end of the real estate subsidiary.
But why this sudden change of direction? What does Norges Bank’s decision tell us about real estate investing, and the future of global capital flows?
Where others fear to tread
Among other things, Norges Bank has been willing to step out where others have hesitated: it has been one of the most prolific pre-Brexit investors in London, snapping up more than $1bn of real estate in the capital in the past two years and defying any wider jitters about the state of the market.
It has also been focused. Since 2011, its property strategy had been concentrated on a limited number of cities with common characteristics in Europe, the US and Asia. These cities have transparent real estate markets with scale, plus expected growth in either population or employment, along with the potential for economic growth and increased trade.
It has chosen cities with constraints on building new real estate which were also highly connected to the global economy, have well-developed infrastructure and are important financial, intellectual and cultural capital centres, which drives demand.
In the US, that meant a focus on New York, Boston, Washington DC and San Francisco; in Europe, on London, Paris, Berlin and Munich; and in the developed markets in Asia, Tokyo and Singapore.
The initial Regent Street purchase was followed by the purchase of a 50% stake in seven properties in and around Paris from AXA Group. In 2012, the fund bought its first property in Switzerland, followed by the first investment in Germany.
It also invested in its first shopping centre and struck a €2.4bn (£2.1bn) joint venture deal with Prologis to own its first warehousing in 11 European countries. The fund’s first real estate investments in the US were made in 2013, in New York, Washington DC and Boston; the first investments in Asia were in Tokyo in 2017.
Yield compression
So why the change in direction? As global property prices have risen, there is speculation that Norges Bank had become reluctant to buy into the lowering yields that have become common in many global cities.
However, Andrew Allen, head of global property research at Aberdeen Standard, says the reason may simply be one of practicality. “Simply investing the scale of money will be a challenge in itself, and of course the operational issues reflecting managing such a portfolio would be considerable,” he says.
“One can understand why the world’s largest investors take more of a 360-degree approach to investment in real estate – that is to say creating optionality through joint ventures, listed, unlisted and so on, to widen the scope of opportunity, benefit from specialist partners and potentially benefit from differential pricing.”
The bank’s objective is now to have a slightly lower property allocation with a portfolio that will consist of both listed and unlisted real estate investments, and there will not be a specific limit on how much listed real estate the fund may have.
Additionally, Norges has said that the portfolio is to be well diversified. “The strategy is to be simple, with emphasis on cost efficiency. Therefore, the real estate organisation will be integrated with our management organisation, NBIM. There will still be enough flexibility to be able to exploit investment opportunities in the unlisted real estate market,” it said.
This diversification, and crucially the greater focus on listed investments, means Norges Bank can increase its liquidity and ensure that it does not end up with too many assets in a particular sector or location.
“I don’t think this is a huge surprise,” says Penny Hacking, head of European investment at Avison Young. “Norges Bank has only been investing between 3% and 5% in real estate anyway, and it has often favoured joint ventures with partners such as the Crown Estate.”
Such partnerships have meant that Norges Bank has effectively handed over the management of its portfolio to someone else, freeing up its resources, she explains. “From what I understand, it was a cost-saving exercise,” she adds.
“I think they can probably invest more quickly in listed real estate and it is much more liquid.”
Quelling the rumours
The company was quick to quash speculation that it was closing its real estate division entirely, instead releasing a statement days after the news about its strategy change broke to make clear that it was still going to be a major player in the sector.
“We would like to emphasise that real estate will continue to be an important part of the bank’s investment strategy for the Government Pension Fund Global, and the fund will be a major player in the real estate markets in the years to come,” it said.
It also suggested that its property workforce would remain, flagging the “competence” of the staff.
Commentators in the sector suggested that moving the real estate programme in-house so that it sits with the rest of Norges Bank’s activities allows the bank to see its investments more holistically, with property playing a part in its wider purpose.
Jon Zehner, global co-head of the client capital group at LaSalle Investment Management, explains that separate real estate subsidiaries had been born out of the need to compensate real estate professionals on a different basis from normal pension fund salaries.
“Investing in commercial real estate is simply expensive relative to investing in equities or bonds,” he explains. Separate subsidiaries were also able to attract other pension funds as clients, as has been common in the Netherlands.
“By bringing it back in-house, it has probably taken the spotlight off those expenses, and shows they have no interest in bringing in other institutional clients,” he explains.
A drop in the ocean
When a major investor changes strategy direction, it is natural that some people might sit up and take note. But even though Norges Bank is enormous and has bought a huge amount of property globally, when all the real estate transactions in the world are taken into account, its spending is little more than a drop in the ocean.
Figures from Real Capital Analytics suggest that investment volumes in real estate globally are around $300bn each year, so Norges Bank’s decision is unlikely to be felt widely.
Zehner thinks the market will barely register Norges Bank’s change in tack. “The market is so big, and there is so much capital,” he says.
“When I joined LaSalle around seven years ago, roughly three-quarters of capital we raised was coming from US pension funds – today it’s about one-third. There is a lot of money coming from the Continent and we still raise good money in the UK, but the real growth in capital for LaSalle is primarily from the Middle East and Asia.”
Hacking agrees. “I don’t think it’s going to have a huge effect on the market,” she says. “It will probably give other people more opportunities, and there are definitely investors who are still very keen on unlisted real estate.”
As for the effect in Norway, the decision doesn’t seem to have rocked the boat: in fact, Norges Bank’s decision to put more money into renewable energy is a starker indication of the way its priorities are changing. In April, it announced plans to double the amount that it could invest under environment-related mandates, planning to add unlisted energy infrastructure to its portfolio – the first time a new asset class has been added to the fund since its move into real estate in 2010.
It seems certain that Norges Bank will continue to buy real estate, but its new strategy will be less labour intensive and more focused on partnering with other investors and increasing diversity in the types of assets it buys. Don’t be surprised if it completes more market-shifting deals in the months and years to come.
