Norway Takes Manhattan

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.

With its new mandate in mind, Norway has wasted little time investing in the United States, snapping up not only the stake in Times Square Tower but also entering a joint venture with asset manager TIAA-CREF. That deal, which closed in February, saw the fund acquire a 49.9 percent interest in a $1.2 billion portfolio of five office properties in New York, Washington, D.C., and Boston.

Having previously partnered with other sovereign wealth funds, including the Future Fund of Australia, TIAA-CREF already understood the advantages of working alongside the national pension funds, including a similar investment timeline.

“We have been engaged in discussions with the Norwegians for many years,” Mr. McAndrews said. “Our shared perspective is the duration we want to hold an asset–we both have long-term outlooks for our investment horizon.”

In New York, the joint venture’s portfolio includes 470 Park Avenue South and 475 Fifth Avenue, with the latter deemed one of the more intriguing acquisitions in the mind of analysts.

“[475 Fifth Avenue] is very much a transitional asset,” Mr. Fasulo said. “It was basically bought as a vacant building, and they’re in the process of refurbishing it. Understanding how they valued that property will be interesting–that might be the upside for Norges in the entire deal.”

Norway’s investment success does not come without its controversies. Leading up to state elections held last month, the country’s sovereign wealth fund, including its real estate investments, dominated much of the conversation. Oil Minister Ola Borten Moe went as far as to propose a separate real estate portfolio with increased exposure to U.S. property investment in an interview with The Wall Street Journal.

The Ministry of Finance, which mandates the country’s investment strategy, balked at the idea.

“In my view, splitting the Government Pension Fund into several smaller management units would not represent an improvement,” State Secretary Hilde Singsaas of Norway’s Ministry of Finance, said in a statement emailed to The Commercial Observer.

“Splitting the fund could be a relevant issue if we wanted different parts of the fund to follow different strategies, but that is not the case for our fund,” she added. “We have one strategy for the entire pension.”

Despite resistance, with victory for the country’s center-right government in elections held on Sept. 9, the possibility of splitting up the fund remains a possibility. NBIM declined to comment on the possibility of altering its investment strategy.

Though Norway has made headlines in recent months, the country’s sovereign wealth fund is not the only–or even the first–to make a foray into the U.S. real estate market.

As early as 2011, the Chinese Investment Corporation, with approximately $575.2 billion in assets under management, acquired a stake in 650 Madison Avenue in partnership with AREA Real Estate Finance. The trophy property has since been agreed to be acquired by Crown Holdings and Highgate for $1.3 billion.

Earlier this year, the Kuwait Investment Authority, with $386 billion in assets under management, got involved in one of New York’s most high-profile development projects, investing in Related Companies’s $15 billion development of Hudson Yards on Manhattan’s Far West Side.

Elsewhere, the Abu Dhabi Investment Authority has been assembling a large real estate team with an impressive pedigree, including hiring Tom Arnold from Cerberus Capital Management as the fund’s head of real estate in the Americas in 2009.

“[Sovereign wealth funds] are much savvier than they were 20 years ago about real estate,” Mr. Fasulo noted. “At this type of level, most of the major sovereign wealth funds are realizing the need to have expert subject matter staff, and from what I’ve seen they’ve hired the right people.

ADIA’s real estate investment mandate boasts a minimum allocation of 5 percent of assets under management and a maximum of 10 percent. With a real estate strategy that stretches nearly 30 years, ADIA has gone as far as to branch out toward managing properties.

“I think once you have enough of a portfolio, it makes sense to build a whole platform around it,” Mr. Fasulo said. “Abu Dhabi has gone through that process of the last several years and has put together a team to manage the assets.”

The appetite for foreign investment in United State real estate could be set to escalate with industry participants rallying behind the possible reform of the Foreign Investment in Real Property Tax Act. The tax, instituted in 1980 during the Farm Crisis, imposes as much as 35 percent in capital gains taxes on international investors with an interest in commercial property and demands the withholding of 10 percent of a property’s sale price to ensure the payment of those taxes.

One of the proposed reforms would exempt foreign pension funds from the 10 percent withholding, which would free up capital for reinvestment in the market.

“FIRPTA does drive minority interest transactions, and I do think it will be at least partially repealed over the next few years,” Mr. Fasulo said. “That could unleash a wave of new capital”

In the meantime, joint ventures, such as those employed by Norway and others, could be the most advantageous entrance to the U.S. market, both for sovereign wealth funds and their partners, who are able to partially exit their investments and allocate assets elsewhere.

“By venturing these assets, it allows us to invest in other assets and spread our risk through other markets and other sectors,” Mr. McAndrews noted. “It is critical to have lifetime partners, so when other large investments come on the market, we can venture them in strategic investments like with Norway.”

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