Real Estate

Lionel Laurent is a Bloomberg Gadfly columnist covering finance and markets. He previously worked at Reuters and Forbes.

Oil-rich economies such as Norway and Qatar have spent the past few years splurging on prime real estate to build a bunker for the bad times. Now those unhappy days are here, the hitch is that one favorite shopping destination -- London -- is looking shaky.

Norway's sovereign wealth fund, the world's biggest, said on Wednesday that it cut the value of its U.K. real estate portfolio by 5 percent after Brits voted to leave the EU. That might not sound too big a discount, given the nasty threat of a British economic slowdown, but the U.K. makes up almost one-quarter of its $27 billion real-estate portfolio, so even a 5 percent cut means hundreds of millions in losses.

Royal Boom
Aggregate sovereign wealth funds' assets under management
Source: Preqin
All dates end-Dec apart from 2014 (end-Mar 2015)

That's not a good look for a fund meant to be a safe store of value for when Norway's economic roof starts to leak -- which is what's happening now, as the country makes its first ever withdrawals to patch up budget holes caused by cheap oil. With London making up almost three-quarters of the fund's U.K. property assets, it didn't appear to be swimming in risky waters. Brexit has changed that.

Yet the fund isn't ready to abandon its British real estate bet, saying it's a "long-term investor" in London property and is ready to snap up "opportunities." It's right to stay the course. While this bricks-and-mortar safe haven has taken a knock, it seems the time for a Norwegian property roll-back isn't here yet.

Much of this is to do with the fund's urgent need to diversify, and its lack of alternatives. Norway's mission of investing in "a wide range" of assets is yet to be fulfilled. Property accounts for just 3.1 percent of holdings, short of its own target of 5 percent. As Bloomberg News reported Wednesday, the government has agreed to boost this to 7 percent, increasing the pressure to find investments.

So the diversification mission will continue. If assets have to be sold to cover up budgetary shortfalls, there's plenty to pluck from the 60 percent of the fund held in equities or the 35 percent in fixed income. 

Norway's fund might also be in a position of relative strength as a property buyer. The pound is at its lowest versus the Norwegian krone since 2014, offering an instant discount, while U.K. interest rates have been cut to a record low.

Sterling has fallen to its lowest against the krone since 2014
Source: Bloomberg

Admittedly, oil hasn't been a great trade lately for sovereign wealth funds investing in real estate -- it cost more than 100 barrels of oil to buy 1 square foot of London office space at the end of June, according to Grosvenor Research -- but it may improve.

Crude And The City
The cost of buying 1 square foot of London office in barrels of oil hit a peak before the Brexit vote
Source: Grosvenor Research

And in a world of negative rates, the yields from London commercial property have appeal. The panic over Brexit also means there are potential bargains. Norway's fund recently snapped up a building on Oxford Street from Aberdeen Asset Management after a 15 percent cut to the asking price.

None of this means sovereign funds will support property forever. There is, of course, the very real risk that the U.K. will bungle its exit negotiations and inflict lasting damage on the City of London. But we live in hope. With asset prices returning to saner levels, there's enough to keep the oil money interested.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

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Lionel Laurent in London at

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James Boxell at