2013 Owners Magazine

Norway Takes Manhattan

While all eyes are on Related Companies, Extell Development and other active Big Apple kingpins, the Land of the Midnight Sun is investing heavily across the city

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Early last month, Norway’s sovereign wealth fund announced it would invest $684 million in a 45 percent stake of Boston Properties’s Times Square Tower.

No small achievement, the investment is the Norwegian Government Pension Fund’s second real estate play in the United States in a span of just eight months as it seeks to rev up its portfolio to as much as 5 percent of total assets under management.

The uptick in activity, prompted in part by the fund’s desire to reduce its exposure to the bond market, is a welcome development for real estate’s largest institutional players now seeking to realize gains on investments made during the past decade and to deploy capital in other sectors of the market.

But while Abu Dhabi, China and Kuwait have all invested heavily in U.S. property over the past decade, it is Norway–with approximately $750 billion in state oil money, the world’s largest sovereign wealth fund–that has made the biggest splash across New York City’s robust real estate market.

Partnering with established New York real estate owners Boston Properties and TIAA-CREF, Norway is snapping up stakes in trophy towers like no other as the dollar values of foreign transactions creep ever higher.

“We are moving into the larger denomination transactions,” Phil McAndrews, head of global real estate transactions and joint ventures at TIAA-CREF, said. “It’s a strong indicator that the U.S. economy is regarded highly around the globe, and real estate is a desirable asset class.”

Sovereign wealth funds, present throughout the world but largely dominated by countries with vast oil and gas wealth, are state-owned investment funds that invest in a variety of asset classes, including equities, fixed income and real estate.

With less than 1 percent of assets under management invested in real estate, Norway is looking to broaden its real estate platform while simultaneously decreasing its fixed-income holdings. The move is largely motivated by the low returns available in the bond market–fixed income returned negative 1.4 percent to the fund in the second quarter of 2013, compared to a positive return of nearly 4 percent from real estate.

Of the world’s 10 largest sovereign wealth funds, no less than five–including the top three–are rooted in state oil profits, according to the Sovereign Wealth Fund Institute. Norway, Saudi Arabia and Abu Dhabi operate the Government Pension Fund, SAMA Foreign Holdings and the Abu Dhabi Investment Authority boasting $737 billion, $676 billion and $627 billion in assets under management, respectively.

“Just through the law of numbers, these sovereign wealth funds are going to be interested in Manhattan,” Dan Fasulo, managing director at Real Capital Analytics, told The Commercial Observer. “The buildings are bigger, the dollars are bigger, and you can invest a lot of money all at once.”

Established in 1990 as the Petroleum Fund, Norway renamed its fund in 2006. The expressed purpose of the Government Pension Fund-Global, which is managed via the country’s central bank via Norges Bank Investment Management, is to “give the government room for maneuvering in fiscal policy should oil prices drop on the mainland economy contract.”

Contrary to the fund’s name, it has no pension liabilities, though it could pay as much as $150,000 each to Norway’s population of approximately 5 million citizens.

Despite its size–it is estimated the fund will be worth more than $1 trillion by 2020–Norway did not make its first real estate investments until 2011. Just 5 percent of the fund’s asset allocation is allotted to real estate, with the remainder dominated by equities (60 percent) and fixed income (35-40 percent).

In fact, still less than 1 percent of the fund’s assets were invested in real estate as of June 30. But with interest rates on the move, Norway’s fund is in the midst of a plan to increase its real estate holdings, motivated by the desire to decrease its bond investment.

“The low returns available in other asset classes certainly has driven capital into the real estate sector; these big funds have been trying to diversify for decades,” Mr. Fasulo said.

Largely invested in the European market, at the beginning of 2013 Norway’s real estate investment mandate was broadened worldwide.

“Norway has been relatively active in Europe–if you have a $1 billion-plus trophy asset to sell, they’re the first person you call,” Mr. Fasulo noted of Norway’s European activities.

Follow Gus Delaporte via RSS. gdelaporte@observer.com