Partnerships help Norway’s wealth flow into property

The Crown Estate and AXA are the initial partners in Norges Bank Investment Management’s push to invest up to €50bn of Norwegian sovereign wealth in property, reports Alex Catalano

Norway’s sovereign wealth fund – officially called the Government Pension Fund Global – is a relatively new kid on the real estate block. Set up in 1990 to invest the country’s oil revenue for future generations, it was initially restricted to buying foreign equities and bonds, but two years ago the Ministry of Finance decided that up to 5% of the €462bn portfolio should be allocated to property.

This instantly transformed the sovereign fund into one of the world’s biggest real estate players, with licence to spend some NK250-300bn (€33bn-51bn) on property outside Norway by 2020.

The man in charge of that investment drive is Karsten Kallevig, the chief investment officer for real estate at the fund’s asset manager, Norges Bank Investment Management (NBIM).

“Part of the reason we’re doing this is  to diversify the portfolio,” says Kallevig. Index-linked rents can also help hedge against inflation. The real estate investments are being funded with capital from the fixed-income portfolio and will be phased in gradually.

“For now I don’t think we will go beyond joint ventures, although over time that may change,” says Kallevig. “Once you find a partner, then that is a relationship you can leverage.”

He first teamed NBIM with another quasi-sovereign wealth fund, buying into one of London’s main shopping precincts:  the Norwegian fund paid £452m for a 25% stake in a 150-year leasehold of the Crown Estate’s Regent Street holdings.

The fund’s second €702.5m partnership deal was taking a 50% stake in seven Parisian office buildings owned by French insurer AXA (see table).

Play for Meadowhall

It is now rumoured to be in negotiations to buy a 75% stake in Meadowhall Shopping Centre in Sheffield for around £1.2bn. The centre, valued at £1.4bn in March 2011, was put on the market earlier this year by joint owners British Land and London & Stamford. British Land manages the 1.5m sq ft complex and would keep a 25% stake.

“Our focus for now on is on local expertise, backed with permanent capital,” says Kallevig. “That’s why the likes of AXA and the Crown Estate are good partners. They have a similar long-term vision and some capable real estate people. So we can leverage our capital.” In both cases the assets are managed by NBIM’s partners.

Both ventures have gone on to buy more properties, spending €290m on a further three Paris office buildings and £78m on three London assets: Maddox House, bought from Aberdeen Asset Management; 4 Conduit Street from a private investor; and Jaeger House on Regent Street from IVG.

“We’re certainly looking at other opportu-nities with AXA on an ongoing basis. It’s the same on Regent Street with the Crown Estate,” says Kallevig.

So far, real estate adds up to NK11bn, a mere 0.3% of the fund’s portfolio. Last year they returned -4.4 %, measured in interna-tional currency, due mainly to one-off transaction costs; in Q1 this year, the return improved to 2.2%.

Although Kallevig also has a mandate to invest indirectly via funds, he isn’t going down that road, “not because they might not be a great way of investing – obviously a lot of funds have done extremely well over long periods of time for large investors and might continue to do so. But for us, the reinvestment risk, where we spend a lot of time and effort deploying capital that we might get back in the next couple of years, is just unhelpful. It doubles the amount of work we need to do.

“With the transactions we’ve done with the Crown Estate and AXA, we might want to sell at some point but there’s no structural reason to sell. It’s not an outside force that says you have to get out of this in five or seven years, when the fund is up.

“I like the idea that you find good investments with good partners and have the ability to stick it out for a longer period of time, deciding on special circumstances as they come up.”

Plus, he points out, it is hard to build a portfolio of any scale if you keep changing the assets regularly, “particularly in real estate, where you have such high transac-tions costs: stamp duty, transfer taxes, legal fees and real estate advisors”.

An eye on more complex deals

So far, so safe, but Kallevig says that in time, the fund should be able to take more risk: “If we had the right partner with the right long-term view, I think we could take on more complicated transactions, or corporate and other transactions. The issue  now is that I don’t think we are prepared to do that by ourselves. It’s very work intensive.”

“Historically some of partners that have typically done these high-risk, high-return transactions have been those with shorter- term capital. They go in, fix it, then they sell out in three or four years. It’s more that which has stopped us from looking at higher-return assets than necessarily a wish for a low-risk strategy.”

When it comes to development, Kallevig  says he is very much a “natural sceptic”. He adds: “My starting point is, ‘I don’t want to do it. Convince me otherwise’. In our perception it’s rare that you get paid for the risk you’re taking.

“If you start out with a virtually clean asset, you can analyse it very carefully: if you have a vacancy, how long will you take to fill it up; you can price it in. It’s very easy to underprice risk when you have something as complex as development.”


For now, NBIM is also sticking to the major European markets. “The UK, France and Germany are all close to home for us, something that’s manageable,” says Kallevig. “The three of them account for 50-60% of the investible real estate market in Europe and they are within the same time zone, compared with flying to the West Coast of the US or to Asia.”

No limits in UK, France and Germany

There is no upper limit for investments in the UK, France and Germany, but only 25% of the real estate allocation can be elsewhere.

NBIM also faces the practical limitations of having only a small team – nine people, including Kallevig, in London, plus a further five back in Oslo.

“We’ve just moved a person to the US, to explore that market,” he says. “Hopefully we can build that out and get more people over there. Once we feel we have a presence in Europe and the US, we’ll look at Asia. Whether that will be in six months’ or 18 months’ time, I don’t know.

“Every person is a deal junkie to some extent. There isn’t an investor in real estate who doesn’t enjoy doing transactions. The problem is to make sure that if you do a lot of transactions over time, you have an organisation to back that.

“It might be tempting to fly around the world, doing great deals in Asia and all over, but personally I don’t enjoy spending that much time on planes; I’d rather build a business.”

MIT graduate explores science of property investment

Karsten Kallevig has the perfect pedigree  to head Norway’s foray into foreign real estate: he is Norwegian, but US-educated, with bags of experience in discreetly placing big-time investors’ money into real estate internationally.

His degree, however, is in materials science and engineering from Massachusetts Institute of Technology – hardly the usual route into real estate.

“I had a summer internship with 3M in Austin, Texas where I did research and development,” Kallevig says. “I really enjoyed it, but at the same time I had a friend who had an internship with an investment bank.

“I figured next summer I’d try that and was fortunate enough to get an internship with Goldman Sachs in London. They put me in the real estate side.”

He then joined Soros Real Estate Partners in London and was a partner in the European investment division of its spin-off, Grove International Partners.

In 2006 Kallevig went to Japan, spending four years heading Grove’s business there. “It is a fantastic country. I really enjoyed it there,” he says.