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After Making Several Big Deals, Norway's $880 Billion Pension Fund Manager has "Limited Enthusiasm" for Property Markets

After Partnering with Prologis and Trinity Wall Street in Major Real Estate Investments, Norges Bank Investment Management Says Market Volatility, Oil Price Shocks Dampen its 2016 CRE Prospects
March 16, 2016
Not seeing a correction in property prices they expected, investment managers of the world’s largest pension fund, Norway’s Government Pension Fund Global worth roughly $879 billion in U.S. currency, say it may be time to sit on the fence before making any more big bets on the global property markets.

The fund returned 2.7% in 2015, helped by its real estate investments, which returned 10%, Norges Bank Investment Management, the fund’s manager, reported this past week.

“2015 was a volatile year, with negative interest rates, currency turmoil, falling oil prices and weaker growth expectations for emerging markets. We have seen fluctuations in the fund’s return from quarter to quarter, but overall a satisfying result," said Norges Bank CEO Yngve Slyngstad.

The share of the fund invested in real estate climbed to 3.1% or roughly $27.2 billion.

The fund's U.S. deals last year included co-investing with Prologis in the $5.9 billion purchase of KTR Capital Partners, which added more than 300 industrial properties to its U.S. holdings.

It also acquired a 44% interest in a portfolio comprising 11 office properties in the Hudson Square area of Midtown South in Manhattan in a joint venture with Trinity Wall Street. The total portfolio comprises more than 30% of the Hudson Square commercial neighborhood and values the properties at $3.55 billion.

Norges Bank’s goal is to get the fund to 5% invested in real estate, which would mean another $16.7 billion targeted for property investment.

And while that represents a significant investment, the pace of that growth may slow this year.

"I have limited enthusiasm for the property market right now," Slyngstad told Norwegian business daily Dagens Naeringsliv. "What we have seen in the property market is that it would appear there are fewer buyers and just as many as sellers, without the prices having really corrected. What it means for us is that it is a suitable time to sit on the fence."

Sharp Fall in Oil Prices Impacting Sovereign Fund Investments

Meanwhile, Moody's Investors Service this past week initiated reviews for a dozen sovereign investment funds to assess the full impact of the oil price shock.

In announcing the potential downgrade reviews, Moody’s noted the continuing fall in oil prices has had material implications for the economic growth and balance sheets of sovereign wealth funds that rely on revenue from oil and gas sales to drive their growth.

JLL also noted in a recent report it expected a reduction in buying activity from Middle East investors in 2016 as they adjust to a prolonged period of lower oil prices.

While total investment levels may fall in 2016, Middle East investors will continue to look for opportunities in safe overseas markets given continued instability within their home region, the report said.

Sovereign wealth funds remain dominant players, but JLL expects to see the continued shift in the market with increased investment in real estate from private investors and family groups.

Last month, CBRE also reported moderating growth in global property markets. However, it still expects worldwide investment sales volumes to grow by 4%.

Although it expects there will still be downward pressure on cap rates, CBRE said the compression should lessen from recent years due to rising U.S. interest rates and less competition in the market from investors from oil-based economies.

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