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From left: Karsten Kallevig, CEO of Norges Bank Real Estate Management; Romain Veber, head of European markets and Per Loken, chief investment officer. The world’s biggest wealth fund has taken note of worrying signs in some global property markets, but decided not to pull back. Photo: Bloomberg

There are worries in some property markets, but it is not time pull out yet, investor says

Karsten Kallevig, CEO of Norges Bank Real Estate Management, oversees US$24 billion in real estate, and is looking for more

There may be worrying developments in some property markets, but the world’s biggest sovereign wealth fund said it had no intention of pulling back from real estate.

A gap is opening between what stock-pickers think real estate is worth and what assets could be worth in the physical market, a potential sign that a correction could be looming. For example, the largest real estate investment trust in the UK, Land Securities, now trades at a 36 per cent discount to net asset value.

“It’s clearly a red flag in pricing if anything is too far off in any direction,” Karsten Kallevig chief executive officer of Norges Bank Real Estate Management, said in an interview at his Oslo office on Wednesday.

Kallevig, 43, now oversees US$24 billion in key real estate, including much of London’s Regent Street, as well as properties on Times Square in New York and the Champs Elysees in Paris, among other prime spots. Overall, the fund holds about US$1 trillion in stocks, bonds and real estate, and is in the process of building its property holdings to about 7 per cent of its total portfolio.

While Kallevig acknowledged that in times of dislocation it was good to be cautious, the alarm bells were nowhere near as loud as they were in early 2016, when the fund took a six-month hiatus from property buying to figure out what was going on.

So far, the fund still has an appetite for new acquisitions. “I haven’t pulled back mandates, that is for sure,” Kallevig said.

The fund’s real estate holdings have returned 5.4 per cent so far this year.

After splitting off from the rest of the fund’s benchmark portfolio and increasing its scope to buy real estate last year, Kallevig is expanding his internal top management team. In September, he appointed two new chief investment officers to oversee the US and European markets.  

The fund’s strategy is to focus on about 10 global cities. The new CIOs see similarities in Europe and the US, and are competing with largely the same bidders on both sides of the Atlantic for the most prestigious properties.

Norges Bank Real Estate Management owns several properties in London’s Regent street. Photo SCMP Pictures

“It’s the same type of names we’re seeing across all our markets, the deals that we target are relatively large,” Per Loken, who is in charge of the US markets, said in the interview.

The fund has ample leeway to boost spending, but remains “cautious” given the amount of cash pouring into commercial real estate in search of a pickup in yield. “We have seen that real estate yields have come down over the past years, but the spread between bond yields and real estate yields still look attractive,” Loken, 35, said.

Investing in global cities, with prime offices being the backbone of the portfolio, the fund also holds retail and logistics properties. With Amazon as one of its biggest tenants, the real estate unit is a close observer of the shift to online shopping. 

“Retail is going through an evolution for sure, and it is something we are very focused on,” said Romain Veber, the London-based head of European markets. The fund is placing its bets on “high street retail,” which will “survive in the long term,” he said. 

The fund owns large parts of Regent Street and the Mayfair district in London, and even snapped up a retail and office property on Oxford Street only weeks after the Brexit vote. It also owns a big shopping centre in the northern city of Sheffield, which has proved to be “resilient,” the 39-year-old said.

“In many ways our retail exposure and logistics exposure are two asset classes that go very well, go hand in hand, with each other,” Loken said.

With a perspective much longer than most investors, and with no need to take up debt to finance purchases, the fund can invest through business cycles and also takes a calm view on political turmoil. The Brexit vote and the election of US President Donald Trump have not fazed the fund to any great extent. 

“We remain focused, we remain cautious, and we try to take advantage of this,” Veber said.

This article appeared in the South China Morning Post print edition as: Largest sovereign wealth fund still keen on real estate