Norway’s moving goalposts

With Norway’s Government Pension Fund Global making its debut in the US real estate market earlier this week, the massive state fund is on its way to fulfilling its mandate to invest up to 5 percent of its assets in real estate and join the ranks of the largest property investors in the world. 

On Monday, Norges Bank Investment Management (NBIM), steward of the Norwegian pension, agreed to buy a 49.9 stake in a portfolio of five offices in New York, Washington and Boston from TIAA-CREF for $600 million. The sovereign wealth fund is making good on its plan to enter the US real estate market this year and gradually invest one-third of its target to the asset class in the Americas. 

In order to reach its 5 percent allocation target by 2020, however, the state fund has a lot more investing to do. Under the current mandate, NBIM would need to invest $46 billion to $55 billion in properties outside Norway, based on the state fund’s current value and projections used by the country’s finance ministry. This means an average of $6.6 billion to $8 billion annually to reach its goal. 

If NBIM is looking at an average investment of, say, $500 million apiece, it could be looking at up to 16 deals per year. It certainly is taking down big ticket deals, but that might be a rather tall order, given the degree of competition for high-quality assets and the infrequency that such large transactions become available.

In the US, NBIM is entering a very attractive market in which to invest, as it offers a great deal of liquidity, transparency and stability. But, given the competition for core assets, in order to achieve its goals, the state pension might either need to look beyond the US’ top gateway cities of New York, Washington DC and San Francisco and move to such secondary cities as Denver or Phoenix.

Asia and Latin America is already the next part of the strategy and these markets will be an essential part of the jigsaw. Asia already accounts for one third of the institutionally investable universe and its core markets are rapidly taking form.

Norway typically invests in partnerships with quality operators and/or other like-minded investors. There are only so many of these players so by the time Norway reaches its target for 2020, it could well have deals with most of the major players in the market. 

But arguably the toughest challenge faced by NBIM is hitting its real estate allocation target for real estate when the value of its resources keeps expanding. In December, the fund was valued at $661 billion. As of this writing, it is now valued at $712 billion. There’s little evidence to suggest this trend won’t continue. As a consequence, its goalposts keep moving further away.

Nonetheless, when NBIM buys it buys big and its assets under management increase markedly. Since making its first property investment in 2011, the state pension has since gone on to execute sizable deals in London, Paris, Frankfurt and Berlin. Its most recent European acquisition, for example, was the purchase of the Uetlihof office complex in Zurich from Credit Suisse for 1 billion Swiss francs (€825.5 million; $1.1 billion).

Why does it matter if NBIM achieves a 5 percent allocation to real estate by 2020. It may not. But the target gives an indication of what the pension believes should be hived off from its allocation to bonds so as to protect against inflation rises between now and then. And with bonds trading at real lows right now, diversifying into real estate makes real sense, regardless of whether or not it can keep up with its investment mandate.