Norway's US$1 trillion fund scales back appetite for real estate deals

Oslo

AFTER a decade snapping up US$25 billion of some of the world's toniest properties in London, New York, Paris and other global cities, Norway's US$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 between 3 and 5 per cent from 7 per cent, 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's in charge of oversight of the fund, said in an interview on Thursday.

The plan was backed by the Finance Ministry. Siv Jensen, Norway's finance minister, said in an emailed comment on Friday that she was "pleased" that the bank continually evaluates how the fund invests. "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 70 per cent, 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 has "hardly" invested in any real estate "net-net" over the past two years. Its property investments have had an average return of 6 percent 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."

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 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. Mr Matsen said that the investor will keep internal capacity for real estate deals and will both buy and sell unlisted property. Mr Kallevig is currently considering the new job offer, Mr Matsen said.

"What's in 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." BLOOMBERG