Norway Restructuring Real Estate Program

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Norway’s $1 trillion sovereign wealth fund plans to cull some of its unlisted real estate assets and discontinue the organization’s property arm.

Norges Bank, which manages the investments of the Government Pension Fund Global (GPFG), wants to reduce its target allocation for the segment to between 3% and 5%, from 7%.

Because such a small fraction of its assets will now be capped to invest in the space, the board decided it will discontinue its real estate organization and manage those holdings under its main investment vehicle, according to a letter to Norway’s Ministry of Finance.

“The strategy is to be simple, with emphasis on cost-efficiency,” the fund said.

The world’s largest sovereign wealth fund has chosen to cut back on unlisted assets to instead focus on listed real estate companies as it has struggled to buy unlisted properties on the cheap. Listed companies are those that are traded on an exchange, like a real estate investment trust. Unlisted are privately held and not traded.

This stirred criticism last year when its finance ministry called the investment division’s unlisted properties “trophy assets” and said these moves lack transparency. In the letter, the bank said that while investments in listed items require less resources, there “should be sufficient flexibility” for some unlisted ventures that “may arise.”

“Investments shall normally not be made in development projects and should be confined to a few strategic cities,” the letter said. “Recent years’ experience with unlisted real estate investments shows that such investments may be complex and resource-intensive.”

Although Norges Bank wants to simplify its property strategy, the implications in major markets such as the US and UK will be felt as these areas lose out on some deals with the largest unlisted real estate investor.

There is no set ratio for how much of the real estate portfolio will comprise of listed or unlisted assets.

After discussions stemming from 2007, the bank first began allocating to real estate in 2010. The 7% target was established in 2016.  As of September 30, 2018, the fund allocated 2.7% to real estate. The rest is in bonds (29.7%) and equities (67.6%).

Norges Bank Real Estate Management, the fading arm, has been active since 2014 as a separate division of the bank’s investment management facility. The bank is expecting some job cuts after the integration.

A new business model for Norges Bank Investment Management will take effect April 1.

“We would like to emphasize 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,” said Norges Bank, which was unable to be reached for comment

Tags: Government Pension Fund Global, Norges Bank, Norway, real estate, Sovereign Wealth Fund