Norway's sovereign wealth fund plans property investment growth in Asia

Targeting an investment horizon of "forever", Norway's US$860 billion oil fund plans to enter the Asian real estate market next year and aims to broaden its asset range to include anything from new developments to refurbishments, it said.

Stepping up its activity after a gradual start and aiming to invest around US$8-$10 billion a year, the fund will also do more property deals on its own as it struggles to find partners with deep enough pockets, said Karsten Kallevig, its real estate chief.

Norway's sovereign fund, the world's largest, has featured in a number of large real estate deals this year, buying Boston's One Beacon Street tower with Metlife, Paris's La Madeleine building and the Pollen Estate in London's West End.

The fund currently has about 1.3 per cent of its assets in real estate but has a mandate to take the allocation up to 5 per cent.

It will stick to buying property in a limited number of big cities, including two it has yet to pick in Asia. Its real estate strategy has already yielded unexpectedly high returns, Kallevig said, although he did not believe returns would stay quite as high.

"We have done very well and probably so well that it's not really sustainable," Kallevig said. "There is no reason we should have this high of a return on a portfolio of this type.

"If you do the math on an IRR [internal rate of return] basis, our return is approaching double digits."

In crowns, the real estate portfolio returned 8.95 per cent in the first nine months of this year, beating the fund's overall 7.35 per cent return and the government's 4 per cent real return target.

With interest rates near record lows and stocks reaching full valuation, the real estate market has boomed this year, with analysts predicting the US and German market recoveries still have some way to run while Britain's is already closer to its top.

The fund does not aim to beat market cycles but seeks long-term growth.

"Real estate has always been cyclical so at some point there will be a downturn, unless x hundred years of history suddenly stops right now," Kallevig said.

Norway's fund has bought just over US$10 billion in properties in a handful of European and US cities since 2010 but has been buying rapidly this year and aims to invest about 1 per cent of its assets in property each year for the next several years.

A developed country with just 5 million people that produces around 1.5 million barrels of oil a day, Norway already has around 1 per cent of global shares stashed in a sovereign wealth fund which the government expects to grow to US$1.1 trillion this decade.

Its focus cities for real estate have included Boston, New York, Washington, San Francisco, London, Paris, Munich and Berlin, with Asia the next step.

"In Asia we have done a lot of work and we'll probably pick two cities to start with, hopefully in 2015," Kallevig said. "In Asia there are more than two cities of interest but to do your job properly, you can't start with more than two."