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NBIM sees RE returns drop by 92%

The world’s largest sovereign wealth fund cited currency movements and UK exposure as major factors in the 2016 performance decline.

Norway’s sovereign wealth fund’s real estate performance plummeted by 92 percent from 2015 to 2016, according to annual results released Tuesday.

Norges Bank Investment Management, the part of Norway's central bank that manages the Government Pension Fund Global, saw real estate return 0.8 percent for the year ended December 31. Listed real estate returned -2.3 percent, while unlisted real estate returned 1.7 percent. In 2015, unlisted real estate returned 10.8 percent and the overall real estate portfolio returned 10 percent.

While Europe – excluding the UK – and the US both had positive real estate returns, NBIM’s UK real estate investments had a -16.9 percent return in 2016. The US comprised about half of the fund’s unlisted real estate investments by value, and the UK made up 23 percent.

NBIM said currency movements dragged down the performance of its unlisted real estate portfolio by 2.5 percentage points. About 46 percent of the firm’s real estate investments were dollar-denominated as of December 31 and about 26 percent were in euros.

Citing market uncertainty amid declining global interest rates and volatility in the listed real estate market, NBIM cut back on its real estate investment activity last year, with a volume of NKr19.5 billion in unlisted real estate, down from NKr44.2 billion in 2015.

In a January 2016 interview in The Wall Street Journal, real estate chief executive Karsten Kallevig cautioned that, due to highly priced markets, the fund would not be able to repeat the average 7 percent annual return in real estate – which it had been achieving in preceding years – for the foreseeable future.

“Our appetite hasn't been reduced,” Kallevig said during the interview. “But times are uncertain.”

Major investments in 2016 included the acquisition of the Vendôme Saint-Honoré, a mixed-use property in Paris for €1 billion; the purchase of two minority stakes in two San Francisco buildings for $452.9 million; and the addition of a further 4 percent stake in a New York office portfolio for $142 million.

Unlisted real estate accounted for 79 percent of the real estate portfolio and 2.5 percent of the overall fund at the end of 2016. The Ministry of Finance has a 7 percent limit for the investment strategy relative to the fund’s market value in 2017.

The fund’s overall portfolio returned 6.9 percent, with equities the top-performing asset class at 8.7 percent. The fund ended the year with NKr7.5 trillion ($106.7 billion; €101 billion) in total assets, with 3.2 percent of its portfolio in real estate.