The real estate portfolio of Norway’s sovereign wealth fund expanded at its slowest ever rate in 2016 in response to market volatility.

Norges Bank Real Estate Management (NBREM), which manages unlisted property for the NOK7.7trn (€842bn) Government Pension Fund Global (GPFG), said it invested NOK19.1bn in unlisted real estate in 2016, less than half of the NOK40bn the year before.

In its newly-released annual report, NBREM said most of the transactions in 2016 took place in the second half of the year.

Karsten Kallevig, NBREM’s chief executive, said in the report: “Volatile financial markets characterised the first half of the year, and we deliberately slowed the transaction activity during this period.”

After that, financial markets seemed to stabilise despite unexpected geopolitical events, he said.

“Real estate transactions picked up, and during the last six months we acquired several properties in both the US and Europe,” Kallevig said.

He said direct property yields were still significantly higher than 10-year government bonds in most of NBREM’s strategic markets.

“However, nominal prices are high and we potentially face a reversal of the yield tightening seen since the financial crisis,” he warned.

Kallevig said the manager was continuing its focus on high quality assets in a limited number of major cities and global distribution networks.

Explaining why Norges Bank sold some of its property assets, he said that, although assets were bought for the long term, some portfolios had assets earmarked for sale from the time of acquisition.

“Assets may also display different risk and return dynamics over time than initially expected or may fall outside of a slowly evolving strategy,” he said.

The market value of the GPFG’s property assets stood at NOK191bn at the end of 2016, up from NOK180bn a year before, and NOK106bn at the end of 2014.

Investments in unlisted real estate came to 2.5% of the GPFG at the end of 2016.

Less than a year ago, the government increased the ceiling on the sovereign wealth fund’s unlisted property investments to 7%.

Mentioning the two figures, Kallevig said: “We will continue to invest without haste and after performing thorough analyses.”

Norges Bank said at the end of February that, even though the maximum allocation for real estate was now 7%, exposure was not likely to rise beyond 5% in practice because of the potential for future falls in equity markets — which could artificially boost the real estate exposure.

Yngve Slyngstad, Norges Bank’s chief executive, said then that the strategy was to increase the fund’s real estate exposure by half a percentage point every year.

Between the end of 2015 and the end of 2016, however, the GPFG’s exposure only grew by 0.1 of a percentage point.