Norway's $1 trillion sovereign wealth fund retreats from global real estate
After a decade of snapping up $25bn (€22bn) of some of the world's toniest properties in London, New York, Paris and other global cities, Norway's $1 trillion wealth fund is scaling back its appetite for real estate deals.
The fund will instead focus more on investing in listed real estate companies as a way of cutting costs and simplifying its approach after struggling to find properties to buy amid near record prices. It lowered its target for real estate in its portfolio to 3pc-5pc, from 7pc, meaning its build-up has now essentially come to an end.
While it doesn't plan to offload the properties it does hold, the loss of such a big buyer will likely be noticed in the biggest real estate markets around the world. The fund owns real estate on Times Square, London's Regent Street and the Champs-Elysees, among other key addresses.
The move marks an abrupt shift for the investor, which was created from Norway's oil income to safeguard wealth for generations to come. It started its push into real estate in 2011, but its focus on keeping costs low is forcing it to rethink its approach.
The fund has also been kept out of the private equity market because of similar concerns over costs and the complexity of managing unlisted investments.
The management should be "cost-effective" and "fairly simple", which means having "an overall property strategy with somewhat greater emphasis on listed holdings", Egil Matsen, the deputy governor at Norway's central bank who is in charge of oversight of the fund, said in an interview last Thursday.
The plan was backed by the finance ministry. Siv Jensen, Norway's finance minister, said on Friday that she was "pleased" that the bank continually evaluated how the fund invested.
"It's important that the management of our shared savings in the fund is good, open and effective," she said.
The investor has struggled to expand its portfolio and reach its intended size. It also recently boosted the portion of shares it holds to 70pc, adding risk to boost returns for the Norwegian generations to come.
In a recent interview with Bloomberg Markets magazine, the fund's chief executive officer Yngve Slyngstad said it had "hardly" invested in any real estate "net-net" over the past two years. Its property investments have had an average return of 6pc a year since the start.
"We have been selling some and buying some," he said.
"There are two reasons for that. One reason is we don't find the real estate market very attractive at this stage in the cycle. But the second thing is more long-term structural. It's hard to scale up real estate for a fund of our size.
"It would require a very large real estate organisation, and I think one of the most important things we are currently contemplating is the extent to which we are willing to build a real estate organisation of that size.
"Structurally, we currently have 2.7pc in real estate. If you want to have an asset class that makes a difference, obviously it would have to be at least 5pc, and preferably 10pc, and it's a current discussion on whether we will go there."
Asked if there was a possibility the fund would never move up to the 7pc limit that it had right now, Slyngstad said: "It is one of the things that we're discussing for the moment."
The property cycle is nearing or past its peak in many of the world's biggest cities. Commercial real estate prices are at or near record highs in much of Europe, while rising interest rates have caused a slowdown in the US.
The fund had taken a more direct approach than several other sovereign investors, making direct deals that require specialist expertise.
While its first forays into global cities including London and New York typically involved ventures with partners including the UK's Crown Estate and New York-based MetLife Inc, it has in recent years also done direct deals without partners.
It will now disband its real estate unit, which has been built up in recent years to about 130 employees out of a total of 570 at the fund. The division head, Karsten Kallevig, has been offered a job to remain in the leadership group. He joined in 2010 to kick off the fund's push into property investments.
Matsen said that the investor would keep internal capacity for real estate deals and would both buy and sell unlisted property. Kallevig was currently considering the new job offer, Matsen said.
"What's on the cards is that the investment pace will be slower for unlisted real estate," he said.
"It's not meant that the unlisted real estate portfolio should be static. There can be both new investments and there can be sales, it's within the strategic direction."
By focusing on listed investments, the fund could also invest in real estate sectors that were not available to it before, he said.