Norway Oil Fund Plans Investments in US Real Estate

on Oct 3, 2012
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Norway’s Government Pension Fund Global (GPFG), the world’s largest sovereign wealth fund, will be closing on its first US real estate investment by the end of next year. “The U.S. is the largest real estate market so if you want to have a global portfolio you must have exposure to the U.S.” said Trond Grande, deputy chief executive officer at Norges Bank Investment Management.

According to Moody’s Investor Service report issued on 13 September, US real estate values have recouped 42 percent since plunging in January 2010 but are still 22.5 percent below their December 2007 heights on the Moody’s/RCA Commercial Property Index. The Oil Fund is preparing to move into the market just as housing values have lost their momentum over the last three quarters. Bloomberg reported that the Urban Land Institute (ULI) reduced its forecast for total US commercial real estate sales through 2014 by 12 percent to $748 billion (£464 billion).

!m[](/uploads/story/514/thumbs/pic1_inline.png)The revised forecasts come as a result of gloomy economic projections. According to an ULI survey property deals will amount to $223 billion (£138 billion) this year, $250 billion (£155 billion) next year and $275 billion (170 billion) in 2014. As financial firms have announced around 60,000 job cuts worldwide their demand for office space has declined and financial centres such as Manhattan’s Plazza district have experienced falling occupancy rates. The availability rate for offices in the Manhattan Plaza submarket has climbed from 10.5 percent in last year’s third quarter to 12.3 percent in August 2012.

The Norway fund has a strategy of buying assets when their prices are declining and, being a long-term investor, has a preference for illiquid assets. Its property portfolio is currently confined to London and Paris, boasting a collection of upmarket addresses. Back in 2010 Norges made its first large direct investment in UK property after it purchased a 25 percent stake in Regent Street for £450 million from the Crown Estate. The current real estate holdings of the GPFG are valued at only $1.9 billion but the asset portfolio weight is bound to change as between 2012 and 2020 the fund plans to spend $43.5 (£27) to $52.1 (£32.35) billion on properties outside Norway.

An incoming acquisition by the Oil Fund, seen as a vote of confidence in the British economy, is the deal to buy 50 percent of Meadowhall shopping centre in Sheffield. As reported by the Guardian, the property company London & Stramford has agreed to sell its stake to the Norges Bank Investment Management for roughly £750 million. If it goes through, this agreement would be one of UK’s biggest property deals and will value Meadowhall at around £1.52 billion. The other 50 percent of the shopping centre will remain in possession of British Land. Meadowhall and other prime shopping malls have done well to weather the recession with a trend for UK consumers using shopping in this kind of regional venue as a day trip.

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This year the Norway GPFG displaced the Abu Dhabi Investment Authority as the largest sovereign wealth fund in the world with assets under management of around $612 billion (£380 billion). The fund posted growth of 10.4 percent in the latest year and in the second quarter of 2012 the Norwegian government poured an additional $12.5 billion (£7.76 billion) of oil revenue coming from Statoil.
According to Stephen Schaefer, professor of finance at London Business School, the GPFG’s future real estate investments may prove to be a promising terrain considering its advantage as a long-term investor. “The Norway fund has a very low need for liquidity. It has a strong revenue stream from oil and is projected to be cash positive for many years to come.” argued Schaefer.

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