Norway oil fund to invest $22bn in key property markets

The Norwegian oil fund has been given the go-ahead to invest up to $22 billion in real estate globally over the next several years, not least by investing in funds targeting prime properties in mature, developed markets.

The country’s Ministry of Finance today adopted rules that set out how the sovereign wealth fund, officially known as the Government Pension Fund Global, will invest up to 5 percent of its portfolio in real estate. The allocation is equivalent to NOK130 billion (€16.2 billion; $21.9 billion).

In order to reduce risk, we have made it a requirement that the investments will be spread over time, over countries and over types of real estate. Investments will principally be made in well-developed markets and within traditional types of real estate. Norway's Minister of Finance Sigbjørn Johnsen

Setting out the new rules, the ministry said Norges Bank, Norway’s central bank which is managing the fund, would be allowed to target unlisted real estate funds provided they were established in OECD countries or countries with which Norway has a tax treaty and tax relationships with.

However, the guidelines ruled out the possibility of the oil fund investing in Norwegian real estate, real estate firms or funds targeting Norway real estate, with ceilings also imposed for investments in emerging markets, development deals, vacant properties, debt and listed real estate shares.

Minister of finance Sigbjørn Johnsen stressed the fund would eye “traditional” real estate investments from mature markets in an effort to reduce portfolio risks and avoid  the heavy write-downs it experienced in 2008.

“In order to reduce risk, we have made it a requirement that the investments will be spread over time, over countries and over types of real estate. Investments will principally be made in well-developed markets and within traditional types of real estate. Even so, we must be prepared for real estate prices to fluctuate a good deal,” said Johnsen.

Norges Bank would also be required to set debt limits for its portfolio, as well as individual investments, and require all managers to provide an annual “external, independent valuation of the unlisted real estate investments”, according to a statement from the Ministry of Finance.

By investing in real estate, we spread the fund’s risk even more. Johnsen

Norges has now been charged with drawing up a multi-year “strategic plan” for investing in real estate, describing “how [it] shall achieve the highest possible net return within the limitations that follow from these regulations”.

The Government Pension Fund Global, which manages revenue from Norway’s oil and gas industries, was last year allowed to increase its exposure to equities to 60 percent from 40 percent, and build an exposure to real estate. The fund will reduce its fixed income holdings by 5 percent to offset the rising real estate allocation.

“By investing in real estate, we spread the fund’s risk even more. Real estate is the largest asset class after shares and bonds, and these investments fit well with the fund’s investment profile,” said Johnsen. “In order to ensure that the investments are carried out in accordance with the ministry’s guidelines, comprehensive reporting requirements have been established.”