NORWAY – Real estate was by far the best-performing asset class for the Norwegian Government Pension Fund Global during second quarter of the year, as the NOK4.4trn (€557bn) sovereign fund generated a marginally positive return on all its investments.

The Norwegian oil fund's property holdings, which accounted for less than 1% of total assets at the end of June, returned nearly 3.9%, outperforming both equities (0.9%) and bonds (-1.4%).

According to Norges Bank Investment Management's quarterly report for the fund, the performance of real estate was aided by beneficial currency movements, which accounted for 1.6 percentage points of the total return.

Rental income contributed 1.1 percentage points, while the net change in the value of properties and debt contributed 1.2 percentage points, measured in local currency, the report said.

The 3.9% return was a noticeable improvement on the -0.3% posted during the first three months of 2013. However, the first quarter losses were largely a result of a 1.6% loss from changes in exchange rates, with rental income almost flat.

The second quarter did not see the fund incur any drain on return from transaction costs from its joint venture with Prologis to acquire a share of 11 distribution facilities in the UK.

The sovereign fund said it had earmarked £56m (€65.4m) for the deal, but that it was not set to finalise before the first quarter of the year.

The Government Pension Fund Global may invest up to 5% of its assets in real estate, which equated to NOK220bn at the end of June.

It is likely to take several years to reach the target due to the size of the fund. Chief executive Yngve Slyngstad also said it was only gradually building the "capacity and competence" required.

It is further limited by the executive board's decision to limit new real estate investments to no more than 2% of fund assets per year.