WSJournal. Norway Looks to Spread Wealth to U.S.
The Norwegians are coming to America.
After spending the past two years increasing investments in Europe's high-end real-estate market, Norway's $682 billion oil fund is poised to hit the U.S. property market with deep pockets and an appetite for big-ticket deals.
The Norwegian Government Pension Fund Global—the world's largest sovereign-wealth fund—has been in talks about deals with potential real-estate partners in New York, Washington and Boston in recent months. On Friday, the Norwegian government gave the fund's manager, Norges Bank Investment Management, the green light to start spending.
Karsten Kallevig, the fund's real-estate chief investment officer, said in an interview last week that NBIM could pull the trigger on its first U.S. deal as early as the first quarter of 2013, likely with a focus on either high-end retail or office space.
The wealth fund, which gets revenue tied to Norway's oil and gas industry, arrives in the U.S. property market at a time when values in New York and other major cities are considered high, and a flood of other foreign investors, including Chinese buyers, are looking for deals.
The Norwegian Government Pension Fund Global
The world's largest sovereign-wealth fund is looking to buy U.S. properties.
- Assets under management: $681 billion
- Real-estate allocation: $34.1 billion
- Money for U.S. real-estate purchases: $11.2 billion
Source: WSJ research
Market participants, however, say Norway's appetite for high-priced properties and its long-term horizon for returns could help it find success in the world's biggest property market.
While prices may be high today, real-estate investors say a similar strategy has historically paid off in major U.S. cities as values there have climbed faster than the country overall.
"They're not necessarily looking to make triple-digit returns and to tell their friends at cocktail parties. They're there to find a stable source of low-risk assets which meet their pensioners' needs," Michael Ashner, chief executive at Winthrop Realty Trust, FUR -0.45% a Boston-based real-estate investor that frequently invests in large deals, said when told of the fund's strategy. The company hasn't worked with the oil fund.
Norway has a lot of money to spend. Mr. Kallevig said as much as a third of the fund's $34.5 billion allocation to real-estate holdings—about $11 billion, at current values—will be spent in the U.S.
It could take until as long as 2021 to reach that allocation target, especially because the fund continues to grow because of the success of Norway's oil and gas industry and the fact that very little of its assets are spent. Investment gains also add to the fund; in the third quarter, for example, the fund's investment return was 4.7%, or $30 billion.
The types of properties the fund initially wants to target—top-quality, well-leased office buildings and retail spaces—are in high demand these days, as U.S.-based pension funds and foreign investors are seeking properties they consider safe. That has driven down yields. Income from those buildings typically brings in just 4% to 5% of a total investment in the first years, a relatively low return for commercial real estate.
The Norway fund's push into real estate began a few years ago, when it began looking to diversify beyond its strict strategy of buying a portfolio of bonds and shares in thousands of global companies.
The fund started buying property in 2011, with the purchase of a chunk of London's prestigious Regent Street. The 113 buildings spread over Regent Street's 39 blocks are owned by the Crown Estate, and Norway snatched a 25% stake in the holding for £452 million (about $731 million).
Mr. Kallevig's group then went on to compile a list of high-end purchases, including a 50% stake in two buildings in Germany, one on Kurfürstendamm boulevard in Berlin and the other in Frankfurt's central business district. The fund has also invested in retail property on Avenue des Champs-Élysées in Paris, and last month it bought Credit Suisse's CSGN.VX -2.17% headquarters in Zurich and entered into a leaseback agreement with the Swiss bank.
On Thursday, NBIM announced its biggest deal yet: purchasing a half-ownership of a $1.6 billion European property portfolio from Prologis Inc., PLD -0.33% a large owner of warehouses world-wide.
Mr. Kallevig has often made big investments nearing or exceeding $1 billion, and has always bought alongside a partner. In Germany, for instance, he spent $1 billion and teamed with AXA CS.FR -0.45% France Insurance Cos., a unit of AXA SA.
He plans to follow that strategy in the U.S. as well.
"We like having partners—50% owners or thereabouts," he said. In the U.S., for tax purposes, the fund will set up domestic real-estate investment trusts in which it will hold at most a 49% stake.
"I don't know when we will get comfortable with other structures," he said.
New York, Washington and Boston are considered "gateway" cities that have solid prospects for population and economic growth and an apparent lack of supply, said Mr. Kallevig, though he acknowledged that staying in that tight-knit pocket of markets could have the fund missing out on activity in other hot markets, such as Dallas or San Francisco.
"It probably means we're going to lose out on some great deals, but we're OK with that," he said.
Some of the largest firms with a similar approach include Boston Properties Inc., BXP -0.91% SL Green Realty Corp. SLG -1.35% and Vornado Realty Trust VNO -0.49% . All three focus on major U.S. cities with high-quality office buildings and retail space and have partnered with other investors in the past on large deals.
Representatives of the companies declined to comment or didn't respond to requests.
Mr. Kallevig declined to comment on specific discussions the fund has had but said "it's not like there is a list of 200 people."
The fund will eventually expand into Asian real estate, but Mr. Kallevig declined to forecast when that will happen. "I don't want to start flying east until we get the U.S. on track," he said.
The oil fund is looking for partners with a long timetable as well as deep pockets. The fund is set up to hold investments for decades if need be, meaning it may hold a piece of property through bubbles, booms, busts and cycles. Moreover, Norway prides itself on not spending its pension assets, which are largely kept in a lockbox for future generations except for a small percentage going toward the annual government budget.
This strategy could help the firm compete for properties that few other buyers can touch.
"The competition for the giant buildings may be a little less fierce than for the smaller check-type deals," said Michael Knott, a real-estate analyst at Green Street Advisors Inc. "The big giant deals are just harder to do."
Write to John D. Stoll at john.stoll@wsj.com and Eliot Brown at eliot.brown@wsj.com
