Norway’s $650 billion sovereign wealth fund is closing in on its first U.S. real estate investment as the market struggles with stagnant prices.
The fund will invest in the U.S. “by the end of next year at the latest,” Trond Grande, deputy chief executive officer at Norges Bank Investment Management, said in a Sept. 27 interview in Molde, Norway. “The U.S. is the largest real estate market so if you want to have a global portfolio you must have exposure to the U.S.”
Built from Norway’s oil and gas wealth, the fund in 2010 got approval to invest as much as 5 percent of its capital in real estate as it seeks to meet a 4 percent return target. It has since bought properties in Paris and London for about $2 billion and real estate accounted for 0.3 percent of its holdings at the end of June.
The fund is preparing its move as a recovery in U.S. real estate values “lost steam” in the last three quarters, Moody’s Investors Service said in a Sept. 13 report. While values have recouped 42 percent since bottoming in January 2010, they are still 22.5 percent below the December 2007 peak on the Moody’s/RCA Commercial Property Price index.
The Urban Land Institute last month cut its forecast for U.S. commercial real estate sales by 12 percent to $748 billion through 2014 because economic projections are “down considerably.” Deals will be $223 billion this year, $250 billion next year and $275 billion in 2014, according to a ULI survey released last week. In March, sales were forecast at $250 billion this year and $290 billion next year.
Some financial centers in the U.S., such as Manhattan’s Plaza district, an area near Central Park that commands the nation’s highest office rents, are facing falling occupancy rates as banks reduce office space. The availability rate for offices in the Manhattan Plaza submarket reached 12.3 percent in August, a two-year high, according to data from Colliers International. It was 10.5 percent in the third quarter of last year. Financial-service firms have announced about 60,000 job cuts worldwide this year, according to data compiled by Bloomberg.
Norway’s fund, which gets its revenue from taxes on oil and gas, ownership of petroleum fields and dividends from a 67 percent stake in Statoil ASA, will spread its real estate investments over time as it builds a global portfolio.
“There are some limitations on how fast we should proceed,” Grande said. “One should not concentrate all investments within one particular period.”
New investments will generally be in well-developed markets and properties such as offices and retail premises, according to the fund’s quarterly report.
Europe’s largest equity investor gets its investment guidelines from the Norwegian Finance Ministry and is mandated to hold about 60 percent in stocks, 35 percent in bonds and about 5 percent in real estate. The fund got its first capital infusion in 1996 and has been taking on more risk as it expands globally, raising its stock portfolio from 40 percent in 2007. It first added stocks in 1998, emerging markets in 2000 and real estate in 2011 to boost returns and safeguard wealth.
The fund has a strategy of buying assets as prices are declining to take advantage of the fact that it has no immediate obligations to pay out.
The fund had a loss of 2.2 percent in the second quarter as stock markets fell. Its real estate investments returned 0.3 percent in the second quarter, helped by rental income and an increase in the estimated value of the property investments.
The fund has bought 25 percent of a portfolio of properties on Regent Street in London and 50 percent of 10 properties in and around Paris. In July, the fund agreed to buy stakes in five properties in the French capital from Italy’s Generali Group.
Following its expansion into the U.S., the fund intends to enter the Asian property market.
“The goal is to have a global portfolio,” Grande said.