November 7, 2010 10:48 am

Norway’s SWF gets active in property

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The Norwegian Government Pension Fund revealed plans last week to consider real estate investments in Germany and France after having struck its first property deal.

The world’s second largest sovereign wealth fund has agreed to pay £448m ($728m) to buy a 150-year lease on a 25 per cent stake in The Crown Estate’s Regent Street properties in London, stretching from Piccadilly Circus to north of Oxford Street.

The deal marks the NKr3,000bn ($521bn) fund’s first real estate investment since it received permission in March to pursue such opportunities. The fund is allowed to gradually invest as much as 5 per cent of its assets, currently representing NKr150bn ($26bn), in real estate with a corresponding reduction in fixed income investments.

Yngve Slyngstad, chief executive of Norges Bank Investment Management, the manager of the fund, says the fund’s real estate investment focus has initially been on England, but it will begin to look at properties in Germany and France in 2011.

NBIM is also considering opportunities in the US towards 2012-13 after it has had time to evaluate the US tax situation, whereby foreign investors in real estate have different treatment compared with domestic investors. The fund’s real return targets are measured after inflation and tax.

“A large part [of real estate investments] will be in big countries and big cities . . . we will stay away from emerging markets,” says Mr Slyngstad. “We have a long way to go before we reach NKr150bn.”

The deal with Crown Estate encompasses 113 buildings spread over 39 blocks in the Regent Street portfolio. The partnership will give the fund 25 per cent of the properties’ net income, which mainly comes from office and retail space rent.

Mr Slyngstad says the fund is looking more towards these types of real estate joint ventures. However, future deals will be bigger in size, partly because it will take several years before the fund can build up a large team to manage all the property investments.

The fund’s real estate investment strategy focuses mainly on unlisted real estate, well-developed property markets and traditional property types, initially in Europe. However, NBIM is hoping to use part of the NKr150bn real estate allocation for other investments.

In a letter to the Norwegian finance ministry – made public in connection with the government’s proposed 2011 fiscal budget last month – NBIM suggested including infrastructure investments and inflation-linked bonds along with real estate in a new “other real assets” category, in which the fund could invest up to 5 per cent. The finance ministry has set up a new strategy council with four external members to consider these proposals. The council is expected to present a report on the fund’s long-term investment strategy to the ministry no later than December 1.

The push to diversify the fund away from equities and bonds was driven by a record loss in 2008, when it fell 23.3 per cent.

However it bounced back in 2009 with a return of 25.6 per cent and the UK real estate announcement came as it reported its fifth-best quarterly return in its history, rising 7.2 per cent, or NKr199bn, in the third quarter, mostly on the back of stock market gains. The fund’s equity investments, which comprise 60.4 per cent of its portfolio, returned 9.8 per cent with BP, the UK oil company, the biggest contributor. Its fixed income portfolio returned 3.4 per cent.

The market value of the fund passed a historic NKr3,000bn milestone on October 19.

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