Relentless monetary easing across the rich world is driving the biggest sovereign wealth fund away from debt markets as it instead targets real estate investments in mega cities.
Chief Executive Officer Yngve Slyngstad says the meager returns bonds offer mean the $860 billion wealth fund needs to look elsewhere to meet its 4 percent return target. At the same time, a study published on Friday by the fund shows there’s an argument for tripling its real estate investment to 15 percent of the total portfolio.
Lars Dahl, chief risk officer for real estate at the wealth fund, says the best property to invest in now is to be found in the world’s biggest cities.
“A city can have growth and can have prosperity without having a population that is increasing fast in the country it resides, ” Dahl said in an interview on Friday. “The urbanization trend lies beneath there with regards to those cities, and is supporting them. When investing in office space, in particular, but also retail space, the cities tend to be more important than the country.”
Boosting the fund’s investment in real estate would free up another $86 billion for that asset class, which would be focused on 10 to 15 major cities around the world. Since winning approval to move into the property market in 2010, the fund has snapped up properties in New York, Paris, London and Berlin, among other cities.
The fund aims to mark its entry into the Asian property market with a purchase in either Tokyo or Singapore, where it already has offices.
“These global cities are spread across the world and the development in these cities aren’t all equal, so we feel that the diversification that this gives us is quite good,” Dahl said. “There isn’t a risk concentration in the portfolio, it is diversified.”
Norges Bank Investment Management, which oversees the fund from within the central bank, held about 3 percent of its assets in real estate at the end of the third quarter. It aims to invest about 50 billion kroner ($5.8 billion) each year in property, under its current mandate. The fund has so far said it can use cash flow of about 200 billion kroner from its investments to make new purchases.
Slyngstad says record-low interest rates will make it difficult to meet return targets in the years ahead. The fund has relied increasingly on emerging markets to make up for slow growth and low returns in the developed world. It also wants to expand into infrastructure and private equity.
The investor lost 273 billion kroner in the third quarter, or 4.9 percent, amid a drop in global stocks. Its equity portfolio declined 8.6 percent, while its bonds rose 0.9 percent and the real estate portfolio rose 3 percent. It was the first back-to-back quarterly loss in six years. The fund’s annual real return has been 3.55 percent since 1998, behind a government target of 4 percent.