MAGAZINE: Norway’s SWF revamps structure for real estate investment

Changes to the way Norway's giant wealth fund invests in real estate could usher in a greater emphasis on the listed sector when Norges Bank Real Estate Management’s (NBREM) 130 staff are merged back into the fund’s investment teams.

For some time now, observers have said Norway’s sovereign wealth fund was struggling to reach it stated target of investing up to 7% of the fund in unlisted real estate. It stood at around 3% as of year-end 2018.

The announcement in February, therefore, that the Government Pension Fund Global (GPFG) had decided on a new strategy was seized on and even led to some reports that might make readers think it was closing down private real estate investments altogether. 

In response, the sovereign wealth fund moved quickly to clarify the position in a second statement, saying: ‘We would like to emphasise that real estate will continue to be an important part of the bank’s investment strategy for the GPFG, and the fund will be a major player in the real estate markets in the years to come.’ 
Norges Bank Investment Management’s Executive Board has decided on a new allocation strategy to make its real estate portfolio 3 – 5 % of the fund’s total assets counting both listed and unlisted property, with no specific limit on either. 

What gave the impression it was ‘closing’ an aspect of real estate is that Norges Bank Real Estate Management (NBREM), which was created about six years ago to invest in global unlisted property, is to be integrated with those involved in listed real estate investments. The unlisted division employs around 130 people and is headed by Karsten Kallevig. 

Egil Matsen, Deputy Governor Norges Bank, explained to PropertyEU: ‘There is no doubt from the Executive Board’s perspective that Norges Bank Real Estate Management has worked very well. The reason we think it is sensible at this point to combine forces of the listed and unlisted side is that the target allocation is being slightly adjusted. Under the new strategy, we have a target allocation for the two combined. There are clear signs that we can gain more exposure to this important asset class on the listed side. In addition, there is an emphasis on cost effectiveness so there may be some synergies when the two are combined.’ Asked if it had been a mistake to create NBREM in the first place, he said ‘no’.

No sales of property are required under the new direction either.

The timing of the decision is down to Norges Bank always reviewing its investment practices every three years. It is into the third year of the latest period and for real estate wanted to start its strategic review early because it wants a new strategy in place before next year’s budget. The integration takes place on 1 April this year. The new three-year period begins on 1 January 2020.

Merger and restructuring
All 130 people within NBREM are due to transfer. It is less easy, said Matsen, to state how many people they will join on the listed-side because there is no separate organisation for it. Some working on listed real estate might be involved in different investing areas. But clearly there are fewer people in the listed side than unlisted.

Asked if all 130 of the unlisted team would definitely remain with Norges, Matsen said: ‘It is a little bit too early to say. The first priority is to combine the two parts and then it is up to the leader groups within the reorganised asset management group to structure it. That is the next step after this integration has taken place on April 1.’ 
He added: ‘We are eager to keep the competence of the unlisted real estate part because it has done a very good job over a span of 6 years. It is a real estate organisation that is very professional and very well respected.’

The decision to have the target allocation at 3–5% over the next three years means that net growth of the combined real estate portfolio will be limited in the sense it is already within that range. The stated estimated target that has been clear for some time is for net investment of up to 0.4% of the fund to be added in real estate every year and a target of unlisted real estate of 4% by the end of this year. ‘We won’t reach that target,’ explained Matsen. ‘There is more opportunity to provide exposure to real estate in the listed market and we are integrating unlisted with listed. We will retain the flexibility to take advantage of options and opportunities that may occur in the unlisted market also.’ Matsen continued: ‘We will remain an important investor in real estate and a player in the market for the next strategic period.’

Asked whether the market should expect a slowdown of investment in unlisted real estate globally, he said: ‘Not necessarily. We are at between 2.5-3% of the fund in unlisted real estate and are at 3-5% of the total of unlisted and listed real estate. Whether that target allocation is mainly achieved through the listed or unlisted-side is up to our investment professionals depending upon their judgments of the attractiveness of unlisted and listed.’ 

According to PropertyEU’s latest Top100 Investors ranking NBIM had €11.6 bn in Europe as of the end of 2017 and €22.3 bn worldwide. NBIM manages a total of NOK 8.6 tln (€833 bn).

Excerpts from the letter sent to the Ministry of Finance, 7 February 2019

Under the management mandate for the Government Pension Fund Global (GPFG), Norges Bank may invest up to 7% of the GPFG in unlisted real estate. Unlisted real estate is not included in the benchmark index as defined by the Ministry of Finance, and Norges Bank finances such investments by selling equities and bonds.

At year-end 2018, the Bank had invested around 3% of the GPFG in unlisted real estate. In addition, the Bank had established a portfolio of listed real estate investments. All together, these listed and unlisted investments accounted for around 4 percent of the GPFG. Unlisted real estate investments are managed by a separate operational unit (Norges Bank Real Estate Management - NBREM). Listed real estate investments are managed together with the other listed equity investments.

NBREM has its own chief executive officer (CEO), appointed by the Executive Board, and its own leader group. CEO NBREM reports to CEO NBIM. CEO NBIM has overarching responsibility for the GPFG, including for the composition of the portfolio and financing of real estate investments.

Strategy plan 2020-2022
           In recent years, the listed real estate market has grown rapidly, and the restrictions on the portion of the voting share in listed real estate companies that GFPG may own have been changed so that the GPFG can hold larger stakes. This may facilitate better diversification of the real estate portfolio across real estate sectors.§

           The investments in listed and unlisted real estate should be viewed as alternative ways of achieving the desired exposure to real estate.§

           Recent years’ experience with unlisted real estate investments shows that such investments may be complex and resource-intensive.§

           The management of the fund should be characterised by cost-efficiency and transparency.§

At its seminar on 22 January 2019, the Executive Board discussed main points of the new real estate strategy. The discussion was based on extensive analytical material, including return and risk estimates for the GPFG under different real estate investment strategies.

At its meeting on 6 February 2019, the Board decided that the new real estate strategy should include the following main points:

           The aim is a real estate portfolio on the order of 3–5%.§

           The real estate portfolio shall comprise both listed and unlisted real estate investments. There is no specific limit on the proportion of listed real estate investments to total real estate investments.§

           The real estate portfolio should be broadly diversified across real estate sectors.§

           Strategy should be simple, with emphasis on cost-efficiency and investments that require limited resources. Investments shall normally not be made in development projects and should be confined to a few strategic cities. There should be sufficient flexibility to take advantage of special investment opportunities that may arise in the unlisted real estate market.§

Organisation of real estate management
With a limited portfolio of unlisted real estate and a desire to integrate listed and unlisted real estate, the Executive Board finds that it is no longer appropriate to organise the management of unlisted real estate separately. The Executive Board has therefore decided to discontinue NBREM as a separate organisational unit. The real estate organisation in NBREM will therefore be integrated with NBIM in an appropriate manner. According to plan, a new organisational model for NBIM will come into effect from 1 April 2019.



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