Photographer: Tomohiro Ohsumi/Bloomberg

Biggest Wealth Fund Ready to Buy ‘A Lot’ of Asian Properties

Norway’s wealth fund is making final preparations for its first Asian real estate investment as it builds a portfolio of properties in the world’s biggest cities.

After scouring Asia for investment opportunities, the $870 billion fund, built from Norway’s oil revenue, has narrowed its search to Singapore and Tokyo, said Karsten Kallevig, head of real estate investments at the Oslo-based fund.

“Tokyo is arguably the single biggest market in the world for real estate,” he said in a March 20 interview. While the fund doesn’t have an ultimate spending target, “we can invest a lot in Asia,” he said.

The Government Pension Fund Global, its official name, targets markets based on growth potential and supply constraints as it seeks to invest in 10 to 15 cities globally. It has already snapped up properties in New York, Paris, London and Berlin among other cities. The fund held about $18 billion, or 2.2 percent of its assets, in real estate last year, and is seeking to build that share to 5 percent.

The focus is on specific markets rather than sectors, Kallevig said.

“When we say Singapore and Tokyo, we mean the better parts” of those cities, he said. “My guess is office properties will be the main component, because that’s what’s for sale in those parts of town. There aren’t many shopping malls in the center of Tokyo or the center of Singapore.”

Recovery Signs

Since Japanese Prime Minister Shinzo Abe took power in 2012, he has pledged to revive the world’s third-largest economy. The nation’s commercial real estate market is showing signs of a recovery and office vacancies, a measure of unoccupied space, in Tokyo fell to 5.3 percent in February from 7 percent a year earlier, according to brokerage Miki Shoji Co.

The Tokyo Stock Exchange REIT index has returned 28 percent over the past year.

Singapore, smaller in size than New York, has seen a booming property market in recent years amid rising wealth and an influx of foreigners. Office rents in the central business district jumped 14 percent last year, the biggest increase in the region, amid a limited supply, according to broker Jones Lang LaSalle Inc.

Diminished Returns

The fund got permission to expand into real estate in 2010 after previously being limited to investing in stocks and bonds. The real estate portfolio returned 10.4 percent last year, as the total fund gained 7.6 percent, its smallest rise since 2011.

The latest investment to be disclosed was a stake in 11 Times Square, a 40-story office tower in midtown Manhattan. It bought a 45 percent stake from SJP Properties and Prudential Financial Inc. for $401.9 million. The fund also owns part of London’s Regen Street with the U.K.’s Crown Estate, and in Paris it owns buildings overlooking the Arc de Triomphe.

The investor has warned it expects diminished returns amid record low, and even negative, yields in key government bond markets combined with slow growth in developed markets. The investor said earlier this month that it lifted its share of lower-rated company debt to 8.3 percent, the highest since at least 2006.

Just as in earlier purchases in Europe and the U.S, the fund will find partners for the Asian expansion, Kallevig said. The next trip to the area will probably be in the second quarter of this year, he said.

“If we’re really successful there, then maybe we can add a third and a fourth and a fifth city at some point,” he said.

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