The Norwegian Government Pension Fund's real estate investment is a bright spot in a landscape where most institutions are scaling back their ambitions. Lynn Strongin Dodds reports

Just as Norwegian pension funds were about to broaden their real estate horizons and venture outside their domestic markets, the credit crunch exploded into a full-blown financial crisis. Events are unfolding with such speed that Norwegian institutions, like many of their European peers, are putting plans on hold, waiting for stability to be restored.

No one would have predicted that in the space of a few weeks, the markets would have unravelled with governments across the globe scrambling to contain the situation. The Lehman collapse is now among a long list of failing banks and neither the staggering $700bn (€546bn) US bailout nor the UK's £400bn (€505bn) rescue package was enough to restore confidence. The biggest shock, though, to the Scandinavian region, has been the virtual collapse of Iceland's banking system with the nationalisation of the country's largest bank, Kaupthing, followed by Landsbanki and Glitnir.

As George Ochs, managing director, real estate and infrastrucure, JPMorgan Asset Management, says: "The Norwegians as well as the Swedish pension funds were becoming increasingly comfortable in stepping outside their home countries but we have definitely seen a retrenchment. Investors are putting things on hold until the end of the year. It is definitely a wait-and-see type of environment for the moment."

Ubbe Strihagen, director of business development for the Nordic region of Schroders PIM, agrees. "The current market turmoil has pushed everyone to focus internally on their positions and the risks in their positions. This is just not tied to real estate. The markets are changing so fast that pension fund boards are concentrating on existing portfolios rather than making new commitments."

This is certainly the case with Vital Forsikring, Europe's largest life and pension's insurance company, with €24bn of assets under management. Its property portfolio experienced a 5.4% drop in the second quarter and the group is trawling through its investments to ensure that the tenant quality and rental income is firmly intact.

Truls Tollefsen, chief executive officer of Vital Eiendom, which manages the real estate interests of Vital Forsikring and DnB NOR, says: "Adding value has always been one of our biggest focuses and this is especially true today. We want to ensure that we maintain and enhance the quality of the current portfolio. We have about 110 people working in the property department and the bulk of them are employed in property management."

Like many of its peers, Vital is sitting on the sidelines in terms of transactions.  "The credit crunch has to some degree changed the risk premium and valuations and while that is good from a long-term property viewpoint, we are worried about the current environment," says Tollefsen. "Deleveraging may cause deal activity to deteriorate further although the good-quality buildings will continue to sell at low yields. For example, last month an office building was sold on a yield of 5.5%. It is the second-tier properties that have been most affected."

 Statistics from Akershus Eiendom show that vacancy rates in office properties are exceptionally low in Oslo, at 3.5%, which is only slightly higher than the 3% at the beginning of the year. The estate agents estimate that a normal level should be about 5-7%. This is due to a high employment level and the trend to move to central premises in the economic boom, as well as limited new construction. However, as in many markets there is now uncertainty over future prospects.

Vital has been an active yet conservative player, increasing its exposure to direct property to 16.8% in 2008 from 11.8% in 2004. Tollefsen says: "The main objective is to provide attractive risk-adjusted return through market cycles and we are very much a local player. About 80% of the portfolio is invested directly in Norway while the rest is in neighbouring Sweden. In the current environment we are very comfortable being close to both our properties and our tenants." 

Office property accounts for half of the portfolio while the remainder is split between shopping malls and hotels. The group has a programme to increase its indirect investments overseas during the next three years but it is likely to be a slow burn until markets stabilise.The Norwegian Government Pension Fund - Global (formerly the Government Petroleum Fund) is also expected to tread carefully.

This past April, the government finally gave the green light to the NOK2,000bn (€253bn) fund to invest in property. At the time, Pål Haugerud, deputy director general at the asset management department at the ministry of finance, which decides the fund's investment guidelines, said it was to be a global portfolio, diversified across different property types, including offices and shopping centres. Investments will be either in listed or unlisted real estate as well as in funds and joint ventures. 

Decisions have yet to be taken on whether there will be requirements on an absolute return target or returns linked to an index. Before the new rule, Norges Bank Investment Management (NBIM) only managed NOK40-50bn in real estate and infrastructure investments for the pension fund, and equity instruments accounted for the bulk of this. NBIM had requested a maximum exposure of 10% but the government capped the property investment at 5%. While this may not sound significant, in cash terms, it translates into €12.7bn. The figure is set to grow as the government continues to pour oil revenues into the fund.

Market participants believe that it could take The Norwegian Government Pension Fund - Global several years to become a major real estate player or reach its 5% limit. Not surprisingly, the current financial turmoil might also hamper its plans. The fund has geared up, though, in terms of bolstering its expertise with the recruitment of Paul Golding, former head of European Property at Merrill Lynch. It is unclear, though, as to whether it will make its first foray before the year is out.

If funds do go outside their borders, Harry Humble, investment director, property product specialist for Standard Life Investments, believes they may look at mature European markets such as the UK and Spain, which are currently being repriced.
"In the past, Norwegian investors among other Nordic institutions were looking at the new geographies as far east as Romania, Bulgaria and Russia. However, there is a growing consensus that the older, more mature markets, such as Spain and the UK, will represent better value than the younger, less transparent east European markets."
 

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