Norway’s sovereign wealth fund is still on the hunt for real estate opportunities despite not making any new investments in the first quarter of the year, according to its real estate chief.

In the first three months of this year, the NOK7.08trn (€759bn) Government Pension Fund Global (GPFG) made no new real estate purchases but sold two logistics properties in Spain in partnership with Prologis, according to its interim report.

Karsten Kallevig, chief executive of Norges Bank Real Estate Management, which runs the fund’s unlisted property investments, told IPE Real Estate: “There will be times when we don’t do any transactions, as we’ve said in this first quarter, which must have been one of the few quarters looking back when we haven’t done any.”

The lull was partly coincidental, with the most recent acquisitions being closed before the start of the quarter. But Kallevig admitted that Norges Bank was “a bit concerned about what was happening [with] underlying rents”.

“It’s very hard to predict the future and therefore let’s continue the path we’re on”

Karsten Kallevig

In some cases, rental growth was flat, while in others it was under some degree of pressure or was still rising, he said. “At the end of the day, real estate to me is about two things. It’s about the cash flow and the risk associated with that cashflow. And the cash flow hasn’t really changed in most markets.”

The GPFG is gradually increasing its real estate exposure – 3.1% at the end of last year – to meet its strategic target of 5%. This has been funded mainly through the sale of fixed income investments. The Norwegian finance ministry has proposed that this strategic target be lifted to 7%.

The fund has the task of reaching its targets at a time when real estate prices are in many cases at record highs. While prices are sure to fall at some point, Kallevig said, his organisation still has a mandate to invest in real estate as part of GPFG’s objective to diversify its overall investment portfolio. “We try to do the best within the mandate we’re given and we think it’s very hard to predict the future and therefore let’s continue the path we’re on.”

Despite real estate prices reaching record highs, Kallevig said the gap between bond rates and real estate yields is also as wide as it has ever been. “Negative interest rates have gone from being an academic curiosity to being the norm,” he says, adding that in this scenario he did not know what would happen.

Ready to move into Asia

The fund is now ready to start real estate investments in Asia, with in-house staff on the ground in local markets – but it has yet to make any purchases. The real estate department opened two real estate offices in Tokyo and Singapore in October last year.

The real estate strategy in Asia will be the same as elsewhere, Kallevig said. “We’ve picked two cities – Singapore and Tokyo – because we think those are two good places to start, and I think the strategy is very similar to what we have done elsewhere.”

The fund will target core, long-term markets, seeking high quality buildings or those that can be improved.

“We would like to start out with partners, so we’ve just got to find the right partner and the right assets, and we’re patient so that might be sooner or it might be later,” Kallevig said.

Kallevig told a news conference last month that the fund’s entry to the logistics sector in December 2012 had been a very deliberate move. “First of all, our mandate says we should be diversified in sectors as well as geographies, so it’s partly a mandate question,” he said. “At the end of the day, our strategy has never been to buy the fancy buildings we can talk about at cocktail parties.”

The foundation for the fund’s real estate strategy has been to invest in long-term markets, he said.

“We have such a big allocation that for us to get into a trading mentality, buying and selling, would be very very hard on this scale and the transaction costs that come with every single deal are typically so high.”

Kallevig said logistics is a sector that balances the real estate portfolio. “You can argue it’s a hedge against internet shopping in the retail component. But at the end of the day it’s really a question of: do you think over time the world will stay global, that products will be produced in one location and consumed in a different location? If you say yes, then chances are you’re going to need logistics space.”

Asked about the locations of the fund’s logistics assets, Kallevig said: “It’s a case of focusing on the global and regional supply chains, it not about buying everywhere for the sake of buying everywhere.”

The fund tends to buy big portfolios, selling any individual assets that do not fit into its strategy. “So the fact there’s now been a handful of small assets for sale, it’s really just adjusting the portfolio rather than a strategic approach,” Kallevig said.

In February, the fund sold stakes in Spanish logistics properties in the northern city of Zaragoza and the port town of Valencia, but it remains exposed to the sector in Spain, with stakes in logistics units outside the capital city Madrid.

Norges Bank’s real estate management operation was set up as a separate unit in August 2014. At the end of 2015, staff levels stood at 122. Kallevig acknowledged that this was less than the 200 forecast in its 2014 to 2016 strategy plan, but was almost double the level it had been at around the beginning of 2014.

“We expected there would be some significant growth in the years ahead. Part of that was dependent on transaction volumes which have been pretty good but also on our geographic growth,” he said.

“Regardless of what our future plans are, it’s very helpful for an organisation to bring on board new people culturally and also organizationally. And regardless, we would need to take a slight breather.”

Kallevig said he expected to be able to continue to build the team, as it was very important to have a competent organisation capable of managing the portfolio. “But at the same time I don’t think we’re going to reach 200 by the end of the year,” he said.