Norway Frees Wealth Fund to Add $17 Billion in Real Estate

  • Property increase falls short of expansion fund wanted
  • Government rejects plea to invest in infrastructure projects

Norway proposed letting its sovereign wealth fund raise real estate holdings by about $17 billion, while rejecting a call to expand into infrastructure projects.

The upper limit on real estate investments for the $850 billion fund, the world’s biggest, should be raised to 7 percent from 5 percent, the Finance Ministry said on Tuesday. The real estate assets will also be separated from the overall portfolio and “be included in the existing framework for deviations,” according to the ministry.

But the government warned the fund to avoid getting close to the ceiling. “Norges Bank must aim for a lower proportion of unlisted real estate than 7 percent to avoid breaching the limit and having to liquidate holdings in the event of sharp, sudden drops in the value of the fund’s listed investments,” the ministry said.

The government launched a process a year ago to consider expanding the fund’s mandate to include infrastructure. The investor has been lobbying to expand its mandate beyond stocks and bonds. In 2010 it was freed to invest 5 percent of its assets in real estate and it has since built a $28 billion portfolio of high-profile properties from Paris to London and New York.

The fund’s managers proposed in December that it be allowed to invest as much as 5 percent in infrastructure as it seeks to boost returns. It also wanted to raise its exposure to real estate to as much as 10 percent. It has suggested that changes would come at the expense of its bond portfolio. It held 3.1 percent in real estate at the end of 2015.

The government rejected the plea to invest in infrastructure, saying among other things that “such investments are exposed to high regulatory or political risk.”

Labor, Norway’s largest opposition party, said it will probably support the proposal to boost the fund’s exposure to real estate, and that, while it’s too early now, it hopes expanding into infrastructure isn’t completely off the table.

“The fund’s growth and the need for higher returns increases the need to continue looking into these kinds of investments,” said Torstein Tvedt Solberg, a Labor lawmaker on parliament’s finance committee that oversees the fund. The government traditionally seeks a broad consensus in changes to the fund’s mandate.

Paal Bjoernestad, the state secretary at the finance ministry in charge of the oil fund, said infrastructure is unlikely to be considered in next year’s proposal.

Norway has started withdrawing cash from the fund to pad widening budget gaps as low crude prices weigh on the oil-reliant economy. The fund’s return in 2015 was the worst since 2011 as volatility from falling commodity prices, the threat of a slowdown in China and rising interest rates in the U.S. plagued global markets.

Parliament has so far been reluctant to let the fund expand into unlisted investments. This year the government added a second deputy bank governor to the central bank to tighten oversight. Critics of boosting exposure to real assets say moving in such a direction would undermine the fund’s success from investing in transparent markets.

“Going into unlisted assets -- real estate and equities -- is a totally different game,” said Espen Henriksen, a Norwegian finance professor who has worked at the fund and this year was part of a panel that gave advice to the government ahead of Tuesday’s report. “There are no economies of scale, it’s less transparent and it’s far from obvious that a government institution has a competitive advantage in these markets.”

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