The manager of Norway’s sovereign wealth fund is changing elements of its real estate investment strategy after years of disappointing property returns, and plans to spread its exposure more broadly across different sectors and use more indirect investment, according to an official letter published this morning.
Norges Bank Investment Management (NBIM), which manages the NOK20.8trn (€1.8trn) Government Pension Fund Global (GPFG), said in a letter to the Finance Ministry: “Norges Bank is not satisfied with the results in real estate management, and is now making changes to the strategy for real estate.”
NBIM was giving the account of real estate management as part of a comprehensive assessment of its management of the GPFG, which was requested by the ministry this summer as part of a major periodic review of the SWF’s management.
The Oslo-based central bank department said the results had to be seen in the context of major changes in the property market since NBIM began investing in real estate back in 2010.
Traditional sectors such as office and retail – which have been significantly affected in the wake of increased working from home and online shopping – now required more operational management, NBIM said, adding that “more recent sectors” had become investable for institutional investors.
“The bank’s strategic choices, including a strong emphasis on traditional sectors, a limited number of countries and cities, and an emphasis on direct investments, have resulted in a portfolio that has been vulnerable to these changes,” the manager told the ministry.
“This has contributed to the real estate portfolio delivering weaker returns than the equities and fixed income we have sold to finance the investments,” it said.
NBIM said its combined real estate portfolio – including listed and unlisted property assets – had underperformed the MSCI Global Annual Property Index since 2019, with its own exposure having been significantly tilted towards the office sector at the start of a period of major structural changes in that sector.
“To better exploit the fund’s characteristics, we will going forward adopt a broader approach to real estate investments,” NBIM said, having cited the GPFG’s size, reputation, opportunity to negotiate better terms, long investment horizon and limited short-term liquidity needs as factors setting it apart.
“Among the considerations we will emphasise in the strategic plan for the period 2026–2028 is the need for the portfolio to be better balanced across a broader range of sectors,” it said.
While in the past, NBIM said it had put a lot of emphasis on direct investments, which required in-depth local knowledge and much specialisation, direct investments with partners would continue to be an important part of the real estate strategy.
“But in the work on a new strategic plan we will also assess the possibilities for a gradually larger element of indirect investments,” it said, adding that indirect investments provided “resource-efficient access to specialist expertise and operational capacity that it is not appropriate to build up internally”.
NBIM said it would also make certain changes to the way it financed real estate investments.
Since 2017, when real estate was removed from NBIM’s benchmark index, its investments in real estate have been financed by selling a combination of equities and fixed income – using the same equity share regardless of the characteristics of the underlying investments, it said.
“Going forward, we will establish a more granular framework for financing, where the equity share will be more closely aligned with the underlying risk of each individual real estate investment,” NBIM said.
It added that the new framework for financing real estate investments was expected, overall to have a somewhat lower equity share than today, leading to a marginal increase in the fund’s total market risk.
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