The Norwegian Government Pension Fund Global has a long way to go to achieve its 5% target allocation to real estate, says Pirkko Juntunen

Since gaining its mandate in March 2010 to invest up to 5% in real estate, the NOK3trn (€388bn) Government Pension Fund Global, managed by Norges Bank Investment Management (NBIM) has built up its internal team and made two major investments in Europe.

Dag Dyrdal, global head of external relations at NBIM, says further diversification of assets was a major goal in adding real estate into the asset mix, as well as adding a strong element of real assets as an inflation hedge.

The real estate investments are funded through capital diverted from the fixed income portfolio. The fund can invest in property, equity and interest-bearing instruments issued by listed or non-listed companies, fund structures and other entities focused on buying, developing, managing or financing real estate. It may also invest in derivatives that are naturally linked to real estate instruments.

The real estate portfolio will be benchmarked against a European property index supplied by Investment Property Databank (IPD). The index measures property performance across 15 European countries, but the Norwegian fund's benchmark may, over time, expand to include other countries in the IPD's global property index.
With assets of over NOK3trn, a 5% allocation in any asset class is not a small undertaking, so NBIM has been working on building up its internal real estate team and expertise.

"There is a capacity constraint issue on how quickly we can invest the assets, so we made a conscious decision to build our own expertise. We are not in any rush to invest," Dyrdal says.

He says the initial target for investments is within Europe, because the region represents an extended home market for the fund. Within this geographical scope, the focus is on the biggest and most transparent markets.

NBIM's first investment, at a value of £452m (€517m), was the purchase of a 25% stake in The Crown Estate's Regent Street portfolio in London on a 150-year lease. The partnership gave the fund 25% of the properties' net income, which primarily comes from office and retail space rent. The Crown Estate retains 75% of the income and will continue to be responsible for the management of the portfolio. This joint venture has since acquired two neighbouring mixed office and retail assets for a further £28m.

Dyrdal prefers the partnership route because they offer a strong local presence, both in terms of the ownership and operation of the real estate. "We enter the partnership on an equal footing, with both parties having skin in the game," he adds.

The same approach is likely to be used in new markets. "We prefer to be a financial investor and not an operational one, which is why partnerships like these work for us," Dyrdal says. In its equity portfolio the fund is limited to holding a maximum of 10% of a company, a restriction that does not apply in real estate, Dyrdal explains.

The second investment was through a joint venture with AXA Real Estate Investment Managers in France. NBIM acquired a 50% stake in seven properties in and around Paris from AXA Real Estate, on behalf of the fund. The purchase price was set at €703m. The properties constitute about 156,000m2 of commercial space - predominantly office - in the western and central business districts of Paris. AXA Real Estate will continue to provide asset management services in the partnership.

These two investments constitute 0.3% or NOK4bn of the allocation, so there is some way to go before the 5% limit is reached, particularly as the fund's assets are boosted annually. According to Dyrdal, some projections predict that the fund will have doubled in size in 10 years' time.

At its current size, the 5% allocation would amount to roughly NOK150bn, but due to the funds' inflows it is always a moving target.

"Over the years it could be twice as much," Dyrdal says. "In any one year we will invest a maximum of 2%. So, mathematically, it will take 2.5 years to reach [that] target but, in reality, it will take much longer."

NBIM is comfortable taking its time to look for the right partnerships and opportunities, Dyrdal adds. "Having invested 0.3% this year makes the 2% annual investment [maximum target look] ambitious and we do not see it happening in the near future," he says.

NBIM's long-term ambition is to invest globally for diversification. "It will never be like our equity holdings where we own over 8,500 stocks, but it will be diversified, although concentrated in key hubs," Dyrdal explains.

Considering the rate of growth and the size of the fund, Dyrdal does not rule out other forms of real estate investment in the future, including real estate debt investment and property funds. "Nothing is given, but joint ventures offer greater involvement and control than funds," he notes.