EUROPE NEWS: Fit for purpose

Ask a fund manager what is the biggest ongoing development affecting private equity real estate, and the chances are that person would say sovereign wealth funds. The sheer amount of capital they are commanding and the way they are investing is having a massive impact upon the industry.

Out of all of them, Europe’s largest sovereign wealth fund and indeed the world’s, The Government Pension Fund Global of Norway, is attracting by far the most attention for the way it is putting large quantities of money to work directly.

Just over the summer alone, the manager of the fund, Norges Bank Investment Management (NBIM), struck up a total of €2.27 billion ($2.93 billion) of deals in Europe and the US.
Last month for example, it flexed its considerable financial muscles once again, this time buying a 45 percent interest in 601 Lexington Avenue in New York, 100 Federal State in Boston and the Atlantic Wharf Office Building, also in Boston, for $1.5 billion. That came only a few days after NBIM said that it had made its first real estate investment in San Francisco. It said on September 5 that it had acquired a 49.9 percent interest in The Orrick Building also known as Foundry Square II in a joint venture with TIAA-CREF.

Three days prior to that, NBIM said it had acquired a portfolio of eight buildings in Madrid and Barceolona that are logistics properties via its existing joint venture with Prologis. That deal was signed on August 22 and the fund paid €242 million for its 50 percent stake. Prologis will perform asset management duties. In August also, it acquired a £343 (€430 million; $576 million) London portfolio having acquired a 57.8 percent stake in the Pollen Estate, a portfolio if 43 buildings located principally between London’s popular Regent Street and Bond Street, including famous Savile Row. The seller of the stake was the Church Commissioners for England, an institution that invests on behalf of the Church of England.

Yet Norway’s sovereign wealth fund is hardly scratching the surface given its aim to have up to 5 percent of total assets in property. Indeed, it is struggling to match property investing aspirations with its $873 billion fund that is expected to top $1 trillion in a few years. So far only 1.2 percent of assets are in real estate.

Its preferred mode of operation is to access assets by forming joint ventures with property owners, developers, asset managers and financial institutions. But at the same time, it is having to build up enormous capability in-house.

A few weeks ago, NBIM reshuffled its real estate team as part of a wider reorganization aimed at clearer definition of strategy. The other major organizational aim being to become more transparent. It emerged that it planned not to double but quadruple the size of its team from 50 to 200 staff within the next three years. Given its aim to invest one percent of the fund each year in real estate or $8.73 billion a year, that means on average each person will be added for $174 million of additional real estate.

The group will now be led jointly by chief investment officer Karsten Kallevig, formerly of global private equity real estate firm, Grove International Partners, who joined at the beginning of 2011 shortly after NBIM won government approval to begin investing in property. In additon to Kallevig, Lars Dahl is chief risk officer, Nina Hammerstad is chief operating officer and Mie Holstad is chief administration officer. Dahl is a new recruit from Nordic property company, Storebrand. All of them report up to NBIM deputy chief executive officer, Trond Grande.

“We’re strengthening the management of the fund’s real estate investments by setting up a separate leader group for real estate. We’re aligning our investment department with the fund’s main strategies, and we’re strengthening our risk and control activities,” Yngve Slyngstad, chief executive officer of NBIM said in the announcement.
But the reality of needing more staff is closer to the intricacies of real estate compared to say buying equities.

It makes no secret of the fact that the fund’s real estate investments are mainly made through subsidiary companies of Norges Bank. This is done to limit liability to just a subsidiary and not the entire bank. This it calls “standard market practice” and supports the bank’s goal of safeguarding assets via this risk management approach. So in May 2011, it set up a subsidiary in Luxembourg through which many of its mainland European real estate investments are channelled. The subsidiary owns stakes in entities owning properties either directly or indirectly. Bookkeeping, accounting, and the transfer of rental income is carried out via the subsidiary. In an interview with the Wall Street Journal, Slyngstad found it important enough to say: “In real estate there are completely new contracts, specific conditions, you have to deal with company structures, tax conditions, and every building is bought individually with [separate] negotiations, so of course it takes more staff.”