Focus on property: NBIM takes the slow and steady approach

Two recent property deals with a combined value of more than €1bn by Europe’s biggest fund, the Pension Fund Global managed by Norges Bank Investment Management, have highlighted its shift towards the asset class, but the manager has stressed that it does not signal a flood of global property acquisitions.

NBIM manages some $650bn (€495bn) in assets on behalf of the fund’s owner, which is the Norwegian Ministry of Finance. Set up in 1990, the fund is intended to invest royalties and other payments from the country’s oil and gas industry.

The fund’s first investments in the 1990s were restricted to bonds, before equities started being added by 1998. By 2007 the portfolio split was about 40% equities and 60% fixed income. Then, NBIM and Norway’s central bank, Norges Bank, submitted a recommendation to the government that the equity proportion be increased, and that assets such as property, private equity and infrastructure be added to the portfolio. The current mandate aims for 60% equities, 35-40% fixed income, and up to 5% in property – which would equate to about $32.5bn based on the current value of the fund.

However, this change toward property, and commensurate reduction in fixed income exposure, is intended to be gradual said Dag Dyrdal, global head of external relations at NBIM.

“It is a moving target as the fund continues to grow,” he added, noting that there is no target date set in terms when the 5% target should be reached.

Another key reason why the fund has not moved more rapidly towards property is the decision by NBIM to build up in-house expertise in the asset class, rather than rely on external managers. About 97% of assets are managed internally, Dyrdal said, and the intention is to do the same with property.

So far, a team has been developed of about 20 people based in Oslo and London, which in turn has increased the capacity to do deals.

NBIM announced a UK property acquisition on 8 October, involving a shopping centre on the edge of the English town of Sheffield. The 50% stake in the Meadowhall centre cost £348m.

On 10 October, NBIM announced its decision to partner with Axa France Insurance Companies to buy two buildings in Germany for €748m.

Both of these deals illustrate the strategy that NBIM is taking with regard to property, Dyrdal said.

The core idea is to work with what the manager calls “partners”, which have local expertise. For example, in the case of Meadowhall the other 50% owner is British Land, which will be responsible for the management of the shopping centre, effectively meaning that NBIM is bringing money to the deal, but enabling the partner to “keep some skin in the game”. Similarly, the deal with Axa in Germany leaves each party with a 50% stake.

Another factor to note is the type of property: existing retail and office space rather than being involved in new builds or the type of property that might fall more into the category of infrastructure.

Examples of previous property deals include the acquisition of a 50% stake in five Parisian properties from Generali Group for €275m, announced in July 2012; the acquisition of a 50% stake in seven properties around Paris from Axa Group for €702.5m, announced in July 2011; and the acquisition of a 25% stake in a 150 year lease on properties owned by the Crown Estate on London’s Regent Street, worth £452m, announced in November 2010.

Dyrdal said that although the process has begun with a focus on European property assets, the fund has a diversification objective overall that leads it to invest globally. That diversification objective is visible in, for example, the roughly 8,000 equity holdings.

The suggestion is that over time property investments will take place in other regions, also with the help of local partners. Further development of its in-house property team will be an important factor in the geographical diversification of property exposure, as expertise is developed around property investments in different regions. The final size of the team is not specified, Dyrdal said, in part because there is a wide-ranging mandate for property investments.

Still, even with increased in-house expertise and increased regional exposure, the expectation remains that achieving the 5% exposure target will be a gradual process. The fund tends towards buying and holding over longer period, and it is reasonable to expect that property investments will be treated in the same way.


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