Norway proposes increased RE target

The country’s Ministry of Finance plans to cap the world’s biggest sovereign wealth fund’s real estate investments at no more than 7 percent of its portfolio.

Norway has proposed that its sovereign wealth fund, the Government Pension Fund Global (GPFG), raise the cap on its unlisted real estate holdings from 5 percent to 7 percent cap, according to a report from the country’s Ministry of Finance published Tuesday.

The world’s biggest sovereign wealth fund currently invests about 3 percent of its NOK7.471 billion (€786.3 billion; $895.3 billion) fund, according to the Ministry of Finance. The government also rejected a move into infrastructure investments in Tuesday’s announcement. Both proposals are subject to parliamentary approval, with a final vote expected this summer, according to The Wall Street Journal.

The Ministry of Finance suggested that unlisted real estate be invested in a separate portfolio, so the fund’s benchmark index would only include listed equities and bonds. The Ministry cautioned that real estate investments should be under the 7 percent cap “to avoid breaching the limit and having to liquidate holdings in the event of sharp, sudden drops in the value of the Fund’s listed investments.” Norges Bank Investment Management (NBIM), which manages the GPFG, will oversee all of the fund’s unlisted real estate investments, according to the report.

“This solution gives a clear division of labor between the Ministry of Finance and the Bank, as well as an overall limit of the Fund’s risk,” said Siv Jensen, the minister of finance, in the report.

Norway has been slowly increasing its real estate investments, just as the fund’s governor said in February that the country may need to withdraw funds this year to combat the fall in oil prices.

The fund originally targeted investing up to 5 percent of its assets in global property, a mark it has been slowly working up to, with about 3 percent invested as of September 30. Since its first real estate investment in November 2010 – the purchase of a 25 percent stake in a property on London's Regent Street – the fund has purchased assets across property types in more than a dozen countries.

The new Ministry of Finance proposal appears to challenge NBIM’s own November report saying it could triple GPFG’s real estate allocation from 5 percent up to 15 percent of its portfolio over an unspecified period of time. To manage its expansion, NBIM promoted its chief investment officer, Karsten Kallevig, to real estate chief executive on January 1. In a January interview in The Wall Street Journal, Kallevig cautioned that, due to highly priced markets, the fund will not be able to repeat the average 7 percent annual return that it achieved in real estate thus far for the foreseeable future.

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