Norway SWF: Opportunity funds don’t serve our purpose

Opportunity real estate funds must wait for the manager of Norway’s sovereign wealth fund, the NOK3,494 billion (€461 billion; $603.95 billion) Government Pension Fund Global, to include them in its investment strategy, an audience in London heard last night.

Karsten Kallevig, chief investment officer for real estate at Norges Bank Investment Management (NBIM), the investment management arm of Norway’s central bank responsible for managing the rapidly growing fund, told an audience at the Reading Real Estate Foundation Annual Lecture, how the firm’s need to invest its capital in long-term assets during its formative years would mean opportunity funds would likely miss out initially.

Since obtaining a mandate from Norway’s government to fill an allocation of up to 5 percent of its assets into real estate in 2010, NBIM has built up a property portfolio valued at NOK11 billion. These assets include a minority stake in London’s Regent Street and a portfolio of Paris offices. In both cases, NBIM teamed up with partners, namely The Crown Estate and AXA Real Estate Investment Managers, which would assume responsibility for the assets’ management, and Kallevig said the state fund manager was keen to form more partnerships on a similar basis. Central to this thesis, he said, was a shared intention to hold the assets for the long term.

He said: “Right now opportunity funds and many closed-end funds don't serve our purpose.”

“The last thing I want to hear is someone say we will definitely get out in five years’ time,” Kallevig said. In reference to vehicles with a closed-ended or limited partnership structure, he added: “We go into situations where there are no structural impediments to holding the asset forever. We might sell at the right point…but we won’t go into something where the exit is what drives the deal.”

Kallevig said NBIM’s investment strategy today is driven by two factors: future income and associated risk. He referenced the acquisition of the 25 percent stake in London’s Regent Street – one of the world’s most popular retail high streets, which NBIM acquired for £448 million (€542.8 billion; $723.3 billion) in November 2010 – as a “close to perfect” transaction. He noted that it offered a “superb” location, more than 700 tenants – meaning turnover could drive income – and a partner that shared its long-term holding perspective.

However, Kallevig did state that, in the future, opportunity funds could play a diversifying role within the real estate allocation of the Government Pension Fund Global. “Over time, they may be an integral part of our portfolio,” he said. “For now, we are building a base.”

For a reason similar to its current aversion to opportunity funds, Kallevig said NBIM also would not be writing loans out to borrowers presently despite increasingly attractive lending conditions. Currently, the senior lending space is enticing new players such as insurance companies, and various sovereign wealth funds also have shown interest as traditional lenders, mostly banks, continue to repair their legacy portfolios and tighten their lending parameters.

“Today, even though the margins are attractive, the opportunities still tend to be short term,” Kallevig said. “Yes, the returns can be 7 percent, 8 percent or 10 percent, but you can be sure it is not going to stay that way over the next few years. It’s going to be repaid at some point and that’s not how we work.”

Kallevig was joined on stage at the event by Chris Morrish, managing director and head of Europe at GIC Real Estate, and David Atkins, chief executive of UK REIT Hammerson.