Friday Letter Waiting for Norway

Norway’s Government Pension Fund Global has been given the green light to invest billions into real estate. Private equity real estate firms should brace themselves for the arrival of Europe’s largest sovereign wealth fund. 

This week heralded the long-awaited official confirmation that Norway’s $300 billion-plus Government Pension Fund Global (GPFG) can invest, for the first time, up to 5 percent of its assets or NOK130 billion (€16.2 billion; $21.9 billion) into real estate.

In sanctioning the allocation, the Ministry of Finance finally put an end to any lingering doubts that a plan to invest its pension and petroleum revenues in the asset class, would not come to fruition. The original proposal, first slated more than three years ago, has survived the economic turmoil.

It is best to wait to see just how much GPFG allocates to externally managed funds. According to PERE sources Norges Bank is expected to publish details of its strategy and allocations within weeks.

In the meantime, a scan of the Ministry’s regulations shows Norges Bank, which will oversea GPFG's real estate investments, has quite wide parameters in which to operate. Indeed it is able to invest in an array of real estate areas ranging from direct investments to indirect investments such as derivatives. But the encouraging sign is that it seems to be putting private equity real estate high up on its list of priorities.

According to Norges Bank's website, the majority of the fund's real estate investments will be in private equity, as opposed to listed securites. It intends to adopt a strategy of indirect investment alongside local operators who will be responsible for managing the assets within a predefined mandate. It could invest via funds, seperate accounts and joint ventures, for example.

It cannot invest in real estate on home turf, in real estate securities black-listed by the Norwegian government or in unlisted companies operating outside of the Organisation for Economic Co-operation and Development. But that still leaves a large investable universe. So long as net returns compare favourably with Investment Property Databank Global Property Benchmark figures – the index recorded ungeared total returns to direct property investments of -10.1 percent in 2008, down from 16 percent in 2007 – Norges Bank has a pretty free brief on the surface of it.

Norges Bank’s real estate investment team is small at present and there is yet to be an implication of rapid personnel growth anytime soon, unlike at certain other sovereign wealth funds. The Real Estate Department of the Abu Dhabi Investment Authority, for example, is in the midst of a substantial recruitment drive precisely so it can adopt a more direct investment strategy and depend less on external managers (Read more on ADIA’s real estate strategy in this month’s issue of PERE). Of course ADIA’s strategy comes after 30 years of real estate investing. So it is logical that GPFG chooses, in its nascent years at least, to trust in outside talent as it starts off.

PERE firms should certainly hope so. But until the picture becomes clearer, it is best to keep the champagne on ice.