Friday 28 April 2017

Norway raises real estate fund by €15bn

Norway's sovereign wealth fund has invested heavily in New York property
Norway's sovereign wealth fund has invested heavily in New York property

Saleha Mohsin and Mikael Holter

Norway proposed letting its sovereign wealth fund raise real estate holdings by about $17bn (€14.98bn), while rejecting a call to expand into infrastructure projects.

The upper limit on real estate investments for the $850bn fund, the world's biggest, should be raised to 7pc from 5pc, the Finance Ministry said on Tuesday. The real estate assets will also be separated from the overall portfolio and "be included in the existing framework for deviations," according to the ministry.

But the government warned the fund to avoid getting close to the ceiling. "Norges Bank must aim for a lower proportion of unlisted real estate than 7pc to avoid breaching the limit and having to liquidate holdings in the event of sharp, sudden drops in the value of the fund's listed investments," the ministry said.

The government launched a process a year ago to consider expanding the fund's mandate to include infrastructure. The investor has been lobbying to expand its mandate beyond stocks and bonds. In 2010 it was freed to invest 5pc of its assets in real estate and it has since built a $28bn portfolio of high-profile properties around the world from Paris to London and New York.

The fund's managers proposed in December that it be allowed to invest as much as 5pc in infrastructure as it seeks to boost returns.

It also wanted to raise its exposure to real estate to as much as 10pc.

The fund has suggested that changes would come at the expense of its bond portfolio. It held 3.1pc in real estate at the end of 2015.

The government rejected the plea to invest in infrastructure, saying among other things that "such investments are exposed to high regulatory or political risk."

Labour, Norway's largest opposition party, said it will probably support the proposal to boost the fund's exposure to real estate, and that, while it's too early now, it hopes expanding into infrastructure isn't completely off the table.

"The fund's growth and the need for higher returns increases the need to continue looking into these kinds of investments," said Torstein Tvedt Solberg, a Labour lawmaker on parliament's finance committee that oversees the fund.

The government has traditionally sought a broad consensus in changes to the fund's mandate.

Paal Bjoernestad, the state secretary at the finance ministry in charge of the oil fund, said infrastructure is unlikely to be considered in next year's proposal.

Norway has started withdrawing cash from the fund to pad widening budget gaps as low crude prices weigh on the oil- reliant economy.

Norge Bank's return in 2015 was the worst since 2011 as volatility from falling commodity prices, the threat of a slowdown in China and rising interest rates in the US plagued global markets.

Parliament has so far been reluctant to let the fund expand into unlisted investments.

This year the government added a second deputy bank governor to the central bank to tighten oversight.

Critics of boosting exposure to real assets believe that moving in such a direction would undermine the fund's success from investing in transparent markets.

"Going into unlisted assets - real estate and equities - is a totally different game," said Espen Henriksen, a Norwegian finance professor who has worked at the fund and this year was part of a panel that gave advice to the government ahead of the report's publication.

"There are no economies of scale, it's less transparent and it's far from obvious that a government institution has a competitive advantage in these markets." (Bloomberg)

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