Since Norges Bank began investing in private real estate on behalf of Norway’s sovereign wealth fund, Government Pension Fund Global, in 2010, the bar has kept getting higher and higher.
The last time the Norwegian government announced a change to the unlisted real estate allocation target for GPFG, in April 2016, it was to raise the upper limit from 5 percent to 7 percent.
At the time of the announcement, Norges Bank reported that private real estate had represented 2.4 percent, or NKr180 billion ($20.47 billion; €18.85 billion), of the sovereign wealth fund’s overall portfolio at the end of 2015.
Two years later, the bank was not much closer to reaching the original 5 percent target. While the unlisted property portfolio had grown to NKr219 billion at year-end 2017, it was still only 2.6 percent of the GPFG’s overall assets, since the sovereign wealth fund had in turn grown from NKr7.5 trillion to Nkr8.5 trillion during the time period, according to the bank’s most recent annual real estate report.
The state fund’s investment pace has been challenged by a property market nearing, or at, its cyclical peak. Combine that factor with a fund that continued to grow larger and larger, and the goal posts seemed like they would keep on moving away – and the pressure to close the allocation gap would keep on mounting.
Then, late last week, Norges Bank opened the relief valve, revealing in a letter to the Ministry of Finance that its executive board had lowered the real estate portfolio target to a range of 3-5 percent.
What’s more, the real estate allocation would include both listed and unlisted property, with no specified split between the two, which would give Norges Bank more flexibility in how it deploys capital in the asset class. With unlisted property currently at 3 percent and listed real estate at 1 percent, GPFG’s property portfolio is, thus, already within its adjusted target allocation range, but still has some room to grow. The only difference now is that growth will not simply come for the sake of growth, as one Norges Bank executive told PERE this week.
In noting the rapid growth of the listed real estate sector in recent years, Norges indicated in its letter to the Ministry of Finance that there may be more investment opportunities in the public side of the market at the current time. Of the $10.4 trillion global institutional real estate market, $4.8 trillion is public, while $5.6 trillion is private, according to LaSalle Investment Management’s 2019 investment strategy report.
Indeed, PERE understands that Norges Bank expects the marginal increase in the pension fund’s property portfolio to likely come from the listed rather than the unlisted side. Listed real estate, particularly in the US, is trading at a relatively more attractive basis than in some of the private markets, the Norges Bank executive said. The average real estate investment trust was trading at an “unprecedented” 14 percent discount to its current market value as of July 2018, compared with an average 2 percent premium historically, according to a report from research and advisory firm Green Street Advisors.
Let us keep in mind that a marginal increase for a sovereign wealth fund the size of GPFG, which had a market value of $1 trillion as of September 30, is still in the billions of dollars realm, and, as noted above, simply maintaining the same real estate allocation means Norges Bank still has a lot of investment activity in the asset class ahead of them.
Whether that activity is more robust on the listed or unlisted sector will largely depend on market conditions. But the fact the bank is no longer under pressure to scale up the state fund’s real estate portfolio signals a new investment mindset for the institution going forward. Meanwhile, Norway’s reduced appetite in real estate may allow other property investors to breathe a little easier.
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