Norway’s intrepid investor

Karsten Kallevig, head of unlisted real estate at Norges Bank and PERE’s latest lifetime achievement award winner, has built a career on taking unexpected turns.

A few things become apparent about Karsten Kallevig over the course of a 90-minute conversation in his Oslo offices. He is direct, confident and fully engaged. He may launch into a lengthy explanation on a topic, but he never forgets the original question asked. He also thrives on a certain level of uncertainty.

Nearly half of Kallevig’s 20-year real estate career has been as head of the unlisted real estate arm of Norges Bank. Norway’s central bank, it manages the oil and gas revenues that make up the $1 trillion Government Pension Fund Global, on behalf of the country’s five million citizens. Norges Bank Investment Management is one of the world’s largest private real estate investors, earning 11th on PERE’s 2018 Global Investor 50 ranking, with $28.6 billion of capital committed to the asset class last year. Given its high ranking, it is also notably one of the newest entrants to property among the 50 institutions, having only made its first investment in the asset class in 2011.

We meet Kallevig as the bank’s real estate business is in the midst of a transition. Shortly before this story went to press, Norges Bank’s executive board made the decision to lower its target total real estate allocation from 7 percent to a range of 3-5 percent, while also combining unlisted and listed real estate investments into one portfolio. Under this decision, Norges Bank Real Estate Management, which is the unlisted property arm led by Kallevig and became a separate entity in 2014, will be recombined with NBIM. Meanwhile, Kallevig will reassume the title of chief investment officer of real estate, a role he previously held from April 2011 through December 2015.

While the details are not yet finalized, Kallevig’s job and team are expected to remain largely unchanged, with the possible exception of NBREM’s risk and compliance staff combining with those of NBIM. But it will not be business as usual in every respect. For one thing, how the 130-strong unlisted team and the three-person listed real estate group – which currently has a separate leader under NBIM – will actually be integrated has yet to be determined.

An accidental beginning

From a young age, Kallevig has been comfortable diving into the unknown. “I never had a grand plan,” says Kallevig, 44. “I never really knew what I was going to do when I grew up; I still don’t. So it was actually completely by accident that I ended up in real estate.”

Kallevig: never expected to have a career in real estate

After growing up in Norway, Kallevig went abroad for university, studying materials science and engineering at the Massachusetts Institute of Technology. After interning with the Norwegian military and 3M in Austin during his first two years at college, he decided to try investment banking after becoming interested in the field through a friend who had worked in the industry. He was accepted for an internship with Goldman Sachs in London and spent the summer working on an Italian hotel portfolio transaction with the bank’s Whitehall real estate funds division.

“I do recall that we definitely wanted to hire him back full time,” says Richard Georgi, who was then Whitehall’s head of European investments and now co-founder and managing partner at Alpine Grove Partners. “He was super smart, had no ego, had a great attitude, a great disposition. He was a sunny, cheerful, happy guy, hard-working and multi-lingual. It didn’t hurt that he liked to ski, too, because a group of us had a passion for skiing. He was a great fit.”

Kallevig indeed got a call from his former Goldman colleagues after he graduated in 1999. Those colleagues, which included Georgi, were preparing to leave the investment bank to launch Soros Fund Management’s real estate business. Instead of staying at Goldman, he opted to follow his former colleagues to Soros.

That summer, he joined what was then called Soros Real Estate Partners and along with Georgi and his assistant, was one of the first three people to join the new office. Over the course of the next five years, Soros continued to build its business and spun out in 2004 as Grove International Partners.

A year later, in 2005, Kallevig was asked if he would relocate to Japan to run Grove’s Tokyo office.

“It was one of those super-exciting opportunities that scared me,” he recalls. “Our firstborn was six weeks old and we lived in London, and our parents that had just become grandparents already thought the London and Oslo distance was a bit too far.”

He had his misgivings about the opportunity, but after telling his wife that night, she responded: “That sounds like a great idea; let’s do it.”

Right in the middle of Kallevig’s four-year stint in Tokyo came the global financial crisis. “Certainly up until that point, that was the most interesting thing I had been through,” he says. “We had the run-up, all the joys of ’06 and ’07, and all the pains of ’08 and ’09 and ’10. It was just a fantastic learning experience.

“Some people say that until you’ve been exposed to a real crisis, you haven’t really experienced the world of investments, because it’s only in a crisis that you’re really exposed to some of these eventualities when it comes to real estate.”

An opportunity of a lifetime

But in 2010, Norges Bank came calling. Georgi had previously convinced Kallevig to stay when he tried to jump to another firm, but this time Georgi didn’t try to talk him out of it. “I had to accept that he should do it,” says Georgi. “It was an opportunity of a lifetime.”

At the time, Norges Bank had little history as an investor, having only begun making its first investments into equities in 1998. In 2008, the Norwegian Ministry of Finance decided that up to 5 percent of the GPFG, which then contained NKr2.28 trillion ($326 billion; €234 billion) of assets, were to be invested in real estate. And so when Kallevig joined Norges Bank in September 2010, he was again in startup mode, as one of only three people in the unlisted real estate team.

Startup mode: Kallevig was one of only three people on the unlisted real estate team when he joined Norges Bank

“The fund was already big enough that the 5 percent real estate allocation at the time was a very, very big number,” Kallevig recalls. “And so there was this whole idea of setting up a real estate business: the people, the team, the systems, how it fits in with the rest of the fund, how do you create a portfolio, how do you think about that?”

One of the first determinations that Kallevig and his team made was that scale would be a major driver in their investment approach, which in turn led to a focus on long-term investments. “We got to make sure we pick assets that can survive through good times and bad times, we pick markets we believe in long term more than micro-locations, and reduce transaction costs, which can be quite significant in the unlisted world. And we wanted to, like the rest of the bank, stay in control of our investments.”

Another important determination was to stick to a limited number of markets. “The closer you are to the market, the more efficient you can be and the more you can react to market movements,” he explains. “If you really understand the local dynamics of tenants, then you can make better investments. The idea of parachuting in and out is not very appealing to us.”

At the end of 2018, 71 percent of Norges Bank’s real estate investments were concentrated in nine cities in Europe, the US and Asia, with the largest exposure in London, at 23 percent; followed by New York at 20 percent; and Paris at 19 percent. It now has real estate offices in Oslo, New York, London and Tokyo.

The bank also has made the bulk of its investments through partnerships, typically structured as 50-50 joint ventures. “Starting from scratch, it’s very hard to do everything yourself,” says Kallevig. “In the beginning, our strategy followed the path of joint ventures with respected partners in the select cities we targeted.” Jointly owned investments accounted for 74 percent of its property portfolio, with the remainder wholly owned as of year-end 2018.

“I find the future hard to predict, and it’s hard to plan. What you can do is do the best possible job at every step along the way”

One of its earliest and largest partners is The Crown Estate, with which Norges Bank jointly owns a large UK retail and office portfolio, including properties on London’s Regent Street. “From the very outset, he’s always been very practical and straightforward and easy to deal with in terms of our relationship,” Paul Clark, chief investment officer of The Crown Estate, says of Kallevig. “He’s very professional, he’s very thorough, he’s thoughtful and insightful. We’re always able to find a practical way to achieve what’s best for the partnership.”

Clark notes that both partners take a broader view on real estate. “In many respects, that’s the most important element of our alignment, because a lot of decisions you make are not necessarily to maximize short-term value,” he says. “You might well accept tenants you think are right for the long-term development of Regent Street, but will not necessarily pay you the highest rent.”

Norges Bank’s approach has led to performance in line with the wider market thus far. It generated a 7.5 percent return in unlisted real estate at the end of 2017, up from a low of 1.7 percent in 2016, but down from the previous three years’ returns, which ranged from 9.6 percent to 11.8 percent, according to its latest real estate investments report.

Navigating the challenges

The timing of Norges Bank’s entry into the market did not make it easy for Kallevig, says Collin Lau, founder of Bei Capital Partners and former global head of real estate at China Investment Corporation, the sovereign wealth fund of China – which also started to build a real estate portfolio just after the crisis.

“I think to his credit, he only started the program when it was already after the time of the most deep distress,” he says. “Having money doesn’t give you any differentiation today. There is plenty of money. What differentiates is actually the ability to go into a pretty developed market when there are so many competitors at all levels, and continue to make your 100 or 200 basis points over and above the others.”

Kallevig: focused on how to do a job better

Michael Turner, global head of real estate at Oxford Properties, the property arm of the Ontario Municipal Employees’ Retirement System, says it was in such a competitive market that Oxford and Norges Bank came together as partners. “Both Norges and Oxford established our US businesses roughly around the same time and, both being long-term investors with a focus on core assets in core markets, we frequently came up against each other on the buy side of a number of deals,” he says. “So we thought it made sense to set up a meeting and it was immediately clear we had a real alignment in our goals.”

Kallevig has faced multiple other challenges in his role at Norges, Georgi adds. “One, it’s almost impossible to keep up with the amount of allocation that they’ve got,” he notes. “I think that’s true for them in the stock market, too. They’re just so big. And to try to make intelligent investments of that scale is really hard to do. The size of every transaction has got to be enormous and long term.”

What is also difficult is the unlisted real estate business is different in nature from Norges Bank’s other investment groups. “They have to have offices on the ground around the world for real estate, because like all of us know, we have to be physically there to understand what we’re investing in and how we’re managing it,” says Georgi. “You can’t do it like a stock portfolio. I think it is unlike any other part of the bank, so that’s challenging.”

An additional challenge is the public scrutiny that comes with working with a sovereign wealth fund. “It’s a small country,” he says. “Everybody has their eyes on these guys every day.”

A shift in mindset

Still, having come from the private equity real estate world, Kallevig finds working at Norges Bank has its advantages. “Of course we have limitations on what we can do, but we certainly don’t have the same type of limitations, it’s not like we need to have a 20 percent return requirement,” he says. “It felt to me like I had more degrees of freedom coming here, not fewer. That will be important going forward as well,” he adds, referring to the planned combination of unlisted and listed real estate.

The reorganization of the real estate group signals a “mindset shift” going forward for Norges Bank, says Kallevig. “We’ve come to a point where the organization is at a maturity level and the portfolio is of a scale where growth is no longer a strong motivator in itself,” he says. “I think the growth going forward will be very different. I think if we find good investments, we will make those investments, but at the same time, it won’t be this statement of we’re going to put in NKr50 billion a year. I think we’ve moved past that.”

Meanwhile, future real estate activity will reflect Norges Bank’s new strategy of focusing on more simple, cost-efficient property investments. “What you will see is maybe that we are more focused on strategies and investments that don’t require a lot of manpower,” he adds. “My guess is the smaller, more complex buildings that require a lot of focus and follow-up we will probably be more reluctant to do than maybe we were before.”

Kallevig finds it difficult to talk about his proudest professional achievements: “In real estate, there are few things you do by yourself. Nobody goes out and buys a building by themselves or sells a building by themselves. I think it’s a team effort.”

He adds that he has had the “extraordinary luck” to have worked with individuals who have given him room to grow, make mistakes and have an open dialogue, but also have been demanding. “I’ve never been exposed to people that I deal with, or report to, who give out a lot of praise,” he says. “There tends to be a focus on how you can do something better. I think unfortunately, I have the tendency to do the same with my team. I’m very pleased that they still hang around. I know I don’t give people typically the praise that they deserve. They do a good job, but I don’t think any of us are doing a job perfectly.”

Having never expected to work in real estate, Kallevig says that as much as he has enjoyed his career in the industry, he is noncommittal about where his professional life may take him: “I find the future hard to predict and it’s hard to plan. What you can do is do the best possible job at every step along the way.” These are modest words from a man just awarded for his professional life’s efforts so far.

Kallevig’s most memorable deals

The Crown Estate’s Regent Street portfolio
Purchase of a 150-year lease on a 25 percent stake, January 2011

“The one that will always have a very special place in my heart was the first one we did here. I remember just being thrown right into it. I had my first day here on September 1, 2010. They had already consulted me prior to that. I think the first non-binding offer was on September 4 or so. So it was literally, let’s just do it. That was a fantastic team  effort from the entire NBIM. People from every group got involved. This would be the very first transaction in the unlisted space that the fund had ever done.

When we were going to sign the contract, which was Thursday, early January 2011, I was in my hotel room in London. I woke up early, turned on BBC News on the TV and the headline is there’s a guy who’s locked himself into a store on Regent Street, threatening to blow the whole thing up. I sat down and read one more time just the clauses on insurance and terror and all of that. Fortunately, it was solved fairly quickly, although they had blocked off enough parts of the area that I remember the taxi ride to the lawyer’s office was very, very quick as half the city was empty at that point. That was a memorable transaction from beginning to end.”

Regent Street: a ‘very special’ deal for Kallevig

KTR logistics portfolio, US
Acquisition of a 45 percent interest for $2.3 billion from KTR Capital Partners in a joint venture with Prologis, April 2015 – Norges Bank’s largest real estate deal

“We had done a couple of deals together already, so we know each other and I was asked whether we would be interested in this sizable deal. It was large, it was high quality, we would do it together, but it would have to be done in a fairly quick and quiet way.”

355-361 Oxford Street, London
Purchase of a 100 percent interest from Aberdeen UK Property Fund, July 2016

“From the day we were contacted to the day we funded the deal was six days. And so that was another memorable deal, because I think it proved that if we need to, we can get things done very quickly. At the same time, on that transaction, I don’t think we skipped any steps. We didn’t bypass any of our normal governance layers.”